Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Autodesk (NASDAQ:ADSK) stock is getting mauled today, down 8% in early afternoon trading. Surprisingly, though, the software company actually beat earnings when it reported its fiscal Q2 2020 results last night.
Problem was, that wasn't all that Autodesk had to say.
Autodesk's Q2 results actually started on a pretty positive note. Sales grew 30% year over year to $797 million, with 96% of that representing "recurring revenue." Autodesk earned $0.18 per diluted share as calculated under generally accepted accounting principles (GAAP), and $0.65 according to the more lenient standard of adjusted earnings.
(Luckily for Autodesk, adjusted figures are what Wall Street focuses on, and so by that standard, the company beat analysts' earnings estimate of $0.61 per share.)
CEO Andrew Anagnost characterized the results as "a solid first half of the year with a very strong second quarter as revenue, billings, earnings, and free cash flow came in ahead of expectations." CFO Scott Herren added that Autodesk booked its "largest quarterly non-GAAP net income to date" and set a "record ... last twelve months free cash flow of $731 million."
Free cash flow for the fiscal second quarter 2020 itself, by the way, was $205 million -- a 754% increase over last year's Q2.
...but guidance down
So much for the good news. Now here's the bad.
For the fiscal Q3 currently underway, Autodesk predicted that it would book revenue between $820 million and $830 million. (Wall Street wants to see no less than $839 million.) Adjusted profit will range from $0.70 to $0.74 per share, which is also short of analysts' estimate of $0.77. GAAP profits will be $0.24 to $0.28 per share.
Likewise for the year as a whole, Autodesk now sees fiscal 2020 sales growing "only" 26% to 27% in comparison to fiscal 2019. (Wall Street wants 27.6%.) And on the earnings front, adjusted profits will probably come in between $2.69 and $2.81 per share. At the upper limit, that matches analysts' consensus estimate -- but should earnings land somewhere more toward the middle of the range of guidance, that would be another miss for Autodesk.
And of course, actual GAAP profits for the year will be much weaker than any of the adjusted numbers -- only $0.75 to $0.87 per share.
What Wall Street had to say about that
Suffice it to say that even $0.87 in GAAP EPS isn't a whole lot to support Autodesk's lofty price tag of nearly $137 per share. The P/E on that calculation works out to a whopping 157.5 -- and Wall Street doesn't seem inclined to make excuses for Autodesk right now.
So far, TheFly.com tallies a total of 12 separate analysts cutting price targets on Autodesk shares today. Granted, most of these analysts still rate Autodesk a buy.
But while the company's prediction of "only" 26% or 27% sales growth this year (which still sounds pretty spry to me) isn't scaring many of these bankers away from their buy ratings, the size of the guidance reduction was enough to convince at least one analyst to cut bait.
This morning, Bank of America cut its rating from neutral down to underperform (i.e., sell), worried that Autodesk's "across the board" lowered expectations presage weakening "manufacturing and construction" activity in key regions including the United Kingdom, Germany, and China. Given this risk, the analyst is not only lowering its price target, but cutting its "valuation multiples" as well, to reflect lowered hopes for growth going forward.
What it means to investors
And I can't say I blame Bank of America. Even Autodesk's fans -- those analysts who cut their price targets while maintaining their buy ratings -- seem worried that "macroeconomic uncertainties and trade disputes" could hurt the company's business in the near term, notes TheFly. Credit Suisse cites further concerns that foreign exchange rates could weigh on the company's profits.
Meanwhile, even 8% cheaper today than its stock sold for yesterday, I cannot say I find Autodesk's valuation attractive -- or offering much in the way of a margin of safety. The "record" trailing-12-month free cash flow that the company's CFO boasted of still leaves shares valued at a rich 45 times trailing cash profits. And the GAAP profit Autodesk expects to earn this year makes the stock look three times more expensive when valued on that metric.
Granted, if the company succeeds in growing its profits at the 50% annual rate that analysts predict for it (according to data from S&P Global Market Intelligence), there's still a chance for Autodesk to grow into its valuation. But to do that...it has to first stop shrinking its guidance.