There has been a lot to like about Autodesk, Inc. (NASDAQ:ADSK) over the past few years. The company has leveraged its position as a business software supplier to add products and customers and made a change to a subscription business model that should stabilize revenue and add long-term value.
It was a bit of a rocky road to get here, with revenue falling from mid-2015 to mid-2017 and net losses still piling up, including $415.1 million in net losses over the past year. But there might be enough of a light at the end of the tunnel to make this stock a buy.
The Autodesk advantage
Autodesk's core business has always been the computer-aided design (CAD) of buildings and manufactured parts. It's a standard product in the architecture industry and has been a player, although not the dominant leader, in 3D modeling for part designers.
What's changed over the last decade is Autodesk expanding its products to include more of the value chain than just modeling. In architecture, that means moving beyond just architectural drawings to the fabrication of parts, quality control, and even commissioning of a building. The company calls it the building information model, or BIM, and it's a full stack of services that make work more efficient, from architecture through the final inspection of a building.
Modeling parts is a very different end market but operates on a similar business model. Autodesk's 3D modeling software has allowed for parts to be built for more than a decade, but Autodesk has added injection molding optimization, milling design, and stress analysis to its software package. For designers, this allows them to predict and optimize how parts will be produced and perform in the real world before spending thousands or millions of dollars on production equipment.
This ecosystem of products is what gives Autodesk an advantage in the software business, and management is expecting the financials to start showing the underlying value of the business very soon.
Financial projections set a lofty bar
You can see below that revenue has been stagnant, and net income is down over the past five years. But this is largely because Autodesk is switching from a software sales model to a subscription model. Subscriptions should smooth out revenue and be higher margin in the long term, but the transition results in lower short-term sales and even losses.
Subscription growth projections are high, but if management hits them, Autodesk's stock could be a huge winner. Between fiscal 2016 and fiscal 2020, management expects subscriptions to grow from 2.6 million seats to 4.9 million. Annualized recurring revenue is expected to grow from $1.4 billion to $3.4 billion over the same time frame. If those targets are hit, free cash flow should be $1.4 billion, according to management's projections.
Is Autodesk a buy?
I like Autodesk's business model, how it's moving to subscriptions, and the revenue and free cash flow growth projections from management. The biggest flaw as an investment is that Autodesk trades at a $33.4 billion market cap, which is 24 times expected 2020 free cash flow. That's a big premium to pay for a company that hasn't yet proven it can generate more than a billion dollars in cash per year.
With that risk pointed out, I'm still cautiously optimistic about Autodesk's stock in the long term. I see nothing but growth for CAD technology in architecture, manufacturing, and other areas. For a leader in the industry, I think there's plenty of long-term growth to justify a premium for the stock today, but investors might have to wait for a return given the great performance already priced into the stock.