Is Autodesk, Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Autodesk, (NASDAQ: ADSK  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Autodesk's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Autodesk's key statistics:

ADSK Total Return Price Chart

ADSK Total Return Price. Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

16.5%

Fail

Improving profit margin

(7.4%)

Fail

Free cash flow growth > Net income growth

(2.6%) vs. 7.9%

Fail

Improving EPS

10.1%

Pass

Stock growth (+ 15%) < EPS growth

11.1% vs. 10.1%

Pass

Source: YCharts. * Period begins at end of Q4 2010.

ADSK Return on Equity (TTM) Chart

ADSK Return on Equity (TTM). Source: YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(21.8%)

Fail

Declining debt to equity

505.5%

Fail

Source: YCharts. * Period begins at end of Q4 2010.

How we got here and where we're going
Autodesk has lost two passing grades from its first assessment last year to its second assessment today, finishing with just two out of seven possible passes. One of these failing grades could have been avoided if Autodesk's free cash flow growth hadn't taken a dive over the past few quarters -- but investors can take heart in the fact that the company's nominal trailing-12-month free cash flow is actually more than double its net income, and a recent uptick provides further hope for an improvement next year. Weaker equity-based metrics also added up to more failing grades. Will Autodesk be able to drive its revenue and free cash flow growth higher in the near future? Let's dig a little deeper to find out.

Autodesk did beat both analyst estimates for both its top- and bottom-line estimates for its fourth quarter, thanks to growing demand for its portfolio of cloud-based building information modeling (BIM) tools as a result of the ongoing U.S. construction rebound. The company also issued decent guidance for 2014, as it expects approximately 3% to 5% total revenue growth on the back of subscriptions and billings growth. Autodesk has been moving away from permanent licenses and upgrades to the recurring subscriptions-oriented sales model now favored in the cloud computing era, and plans to complete this transition in the next four years, which should ensure its long-term prospects. It expects annual billings to grow 12% annually through its 2018 fiscal year, with a 50% uptick in subscriptions over the same period.

Autodesk also completed a number of acquisitions over the past few quarters, which have given it a foothold in the infrastructure and automobile software applications market. German-based visualization technology specialist PI-VR became an Autodesk subsidiary in January 2013 -- its virtualization technology helps automakers design and engineer prototype models. Autodesk also acquired two U.K. based firms -- Bestech Systems and Savoy Computing Services -- in the second half of 2013, bolstering its building information modeling solutions. Bestech Systems specializes in the design of small and medium-span bridges, and Savoy is a vehicle flow specialist, particularly when it comes to designing parking structures and roundabout intersections.

Fool contributor Maxx Chatsko notes that Autodesk has also been working on synthetic biology applications under the somewhat ominous aegis of "Project Cyborg," which should allow scientists to design and build human tissues and organs, single cell organisms with novel metabolic pathways, and programmable nanoparticles. However, the company might have to overcome several obstacles, including regulatory approvals, before it can launch this product commercially. Autodesk should also be able to capitalize on 3-D printing technology, which has attained significant traction (and more significant media attention) over the past few years. One such venture into this field is a free software platform called 123D, which can create virtual 3-D objects from photographs.

Putting the pieces together
Today, Autodesk has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Comments from our Foolish Readers

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 April 23, 2014, at 3:15 PM, TMFBlacknGold wrote:

    Awesome analysis, Alex!

    You wrote:

    "However, the company might have to overcome several obstacles, including regulatory approvals, before it can launch this product commercially."

    I don't know if Autodesk needs regulatory approval before it can offer Cyborg commercially. The products created from it may or may not, depending on application.

    Maxxwell

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