In prior economic downturns, demand for Autodesk's (NASDAQ:ADSK) design software for architecture, engineering, and manufacturing has suffered. But 2020 is different. Not only is the coronavirus crisis creating unique challenges for organizations to navigate, it has simultaneously created opportunities for those that have already been upgrading to a digital-first era. That's just the situation Autodesk finds itself in: There are difficulties arising as a result of the global economic shutdown, but its suite of design software had already been transitioning to a model that would make it more resilient in lean times.
The first quarter of 2020 bore this out, and Autodesk forecast another year of strong growth ahead even in the face of adversity. It doesn't exactly come cheap, but this stock is a buy.
A great start to a forgettable year
Autodesk had a great showing in 2019 as it outpaced stellar returns for the stock market overall, and while 2020 is proving to be a memorable start to the new decade for all the wrong reasons, Autodesk followed up last year's performance with a strong showing in the first quarter. Revenues increased 20% year over year to $886 million, adjusted operating profit margin increased 10 percentage points to 28%, and adjusted earnings per share increased 89% to $0.85.
While momentum is going to fade in the second quarter, management said it expects full-year 2020 revenues to increase 12% to 15% and adjusted earnings per share to increase 26% to 40%. Expectations are lower than what was laid out at the onset of the year. However, some of the small businesses (10% to 15% of total revenue) Autodesk provides service for are facing supply chain disruptions. Net revenue retention rate is also expected to fall in the 100% to 110% range (down from the previous 110% to 120% range). Many license renewals aren't increasing usage of software at the moment, as the pandemic is leading many design firms to tighten their belts.
Nevertheless, growth is growth, and full-year guidance is a rarity these days amid the COVID-19 situation. Numbers for a single quarter -- even expectations for a full year -- don't make the stock a buy, but they do attest to two things working in Autodesk's favor. First, the company's design software is an integral part of the economy; and second, new billing features and tools make the software easier for users to stomach when things head south.
A top play for the decade ahead
Digital design software for architecture, engineering, and manufacturing is nothing new, and Autodesk's AutoCAD and related software have been around a long time. It's the established leader in these segments, and while many projects around the globe are getting put on hold, firms are still in need of these staple services. Thus, as much of its business is based on license renewals, Autodesk is doing just fine at the moment. Strategic areas of expansion like construction management and planning are helping make up the rest of the company's growth profile.
But while a business based on renewing relationships with existing customers may not sound particularly exciting, Autodesk has a strong pipeline built up in this department thanks to new feature releases in recent years. Migrating customers to the cloud has been particularly prescient, since work-from-home is now so commonplace. And with the cloud comes the ability to work remotely as well as collaborate with team members, a tool that has become an absolute necessity in recent months.
What also comes with cloud software access is a more stable method of billing. Autodesk continues to migrate to a subscription model versus an event-driven upgrade cycle model (think of the days when you had to pay a large sum up front for Microsoft Office versus the monthly subscription it has evolved into). That makes continual payment and license renewals easier for Autodesk's users to stomach, and it's helping the company land new deals in industries ranging from manufacturing (a large semiconductor company was cited as a new customer in the first quarter) to construction (a fast-growing contractor in the southeastern U.S. also signed on).
But what of valuation? Trading for 31.6 times free cash flow (revenue less cash operating and capital expenses) as of this writing, it's hardly a value stock. However, profits are growing at a faster rate than the top line, which means the future earnings potential for the stock outweighs trailing 12-month valuation metrics. Expected free cash flow of $1.3 billion to $1.4 billion this year is flat compared to last year, but strong growth in the bottom line should resume once the company transitions out of coronavirus crisis mode and back to business as usual.
Besides being a better way of paying for the average customer, the cloud and subscription model is what's responsible for Autodesk's revenue growth and surge in profit margin. This transition is far from over and should keep the company's mostly customer-renewal-focused business on a steady rise for the foreseeable future. Add in the increased necessity of remote work that the company can enable, and this gives it a leg up in marketing in its growth markets. Autodesk looks like a solid bet on the future of design work in the decade ahead and is a solid place to invest some cash right now.