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Autodesk Designs a Buy on Weakness Opportunity

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Woe is the tech company that reduces its forward guidance. The market judges such firms harshly, and if estimates for future periods are reduced a stock can get hammered. That's what happened to design software specialist Autodesk (Nasdaq: ADSK  ) this past earnings announcement, after which the shares lost 13% of their value to plunge to barely over $30 that day. Never mind that the company is and will continue to be a leader in its segment, and that it's always grown its revenue and bottom line over time.

Too pretty for this gang
Autodesk was one of the market's big losers the day the announcement (and that scary guidance) was made. Its 13% share price tumble was among the bottom four big-name performers that day, joining other tech concerns such as Zynga (Nasdaq: ZNGA  ) and Yelp (Nasdaq: YELP  ) .

That wasn't fair; Autodesk deserves to be in much better company. Unlike Zynga, which is still effectively pasted to one big business partner (Facebook), Autodesk has a wide range of clients and excellent diversification around the globe. And, more importantly, in contrast to a young and consistently red-ink-producing beast like Yelp, Autodesk has a long and distinguished history of not only making money, but also notably improving its business as it does so.

Unfair punishment
And what big crime did Autodesk commit to end up in the cell with those rogues? It dialed down EPS estimates for the upcoming quarter to between $0.46 and $0.51 per share, in contrast with previous analyst expectations of $0.51. On an annualized basis, even if the company were to plunge to the lowest number in that range, it would still see a year-on-year improvement of 45%. This is far from a punishable offense.

This is a robust and well-managed company. It's far and away the market leader in its core niche segment of architectural design software, and its flagship product, AutoCAD, is considered the standard by which all other competing programs are measured.

Not only that, but Autodesk has also pushed assertively into the hot market for visual-effects software for film and video. Revenue from its media and entertainment product segment grew 9% year on year in 2012, nearly matching the growth level of its architectural solutions. As anyone who's seen a recent movie or TV show can attest, digital visual effects are now commonplace in every genre. This is a segment with legs, to put it mildly.

Look who's cheap now
Autodesk isn't a perfect company, of course. One area of concern is that geographical reach, which is admirably but at the moment probably a little too concentrated in the Europe, Middle East, and Africa region, from which it derived nearly 40% of its total sales in the most recent fiscal year. The wobbly state of the former continent makes that revenue vulnerable.

But it still looks compelling on the back of its new share-price weakness. The stock has now dipped into the lower end of its 52-week price range, matching it well against historical design software rival Adobe (Nasdaq: ADBE  ) , which at $31.31 is edging close to its yearly high, or maker-of-every-kind-of-software-suite Microsoft (Nasdaq: MSFT  ) , whose sleepy shares are hovering around the $30 level as they've seemingly done since the dawn of time.

Meanwhile, Autodesk has the two of them beat in terms of expected two-year EPS growth. It comes in at nearly 9,038%, while analysts expect just 14% for Adobe, and 13% for Tortoise Microsoft.

Autodesk's next quarterly results aren't due until late in the summer. This means there's probably plenty of time to take advantage of the buy-on-weakness opportunity the shares present. The company's stock is a fine addition to any tech-flavored portfolio, and I believe it's very likely its price level won't stay this low.

Autodesk is a company with a long history behind it, but how about some of those newcomers? We have a stock recommendation for you from the army of recent tech IPOs. Find out which company that is in our free report, "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Download your copy.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Adobe Systems and Microsoft, creating a bull call spread position in Microsoft, creating a diagonal call position in Adobe Systems. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (0)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2012, at 12:10 AM, Archadam1 wrote:

    As a personal and daily user of Autodesk's software, I must say that they are transforming the AEC industry for the better and opening up many new possibilities that never existed before. Just as CAD drafting created a revolution from hand drafting which rippled through all forms of manufacturing in the 1980's, Revit is doing that same thing again for the Architectural industry -- and that's only to mention one sector they are working in. There really is something amazing going on at Autodesk.

  • Report this Comment On May 24, 2012, at 4:13 PM, TMFVolkman wrote:

    Revit's apparently an excellent product, but it seems like it's been slow to take off. From my perspective as an outsider it appears that the industry is very much tied to tradition. Maybe that's why Revit isn't sweeping the business quite as fast as it should.

    As an architect, you have an interesting perspective and a bird's-eye view as a regular user of the company's products. This is an advantage over purely financial investors - very often they too narrowly look at the financials and not the underlying financials, which is in my opinion the big reason the stock got hammered after the earnings announcement. I agree with your assessment - interesting company, compelling products, lots of potential.

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