What happened
Shares of Autodesk (ADSK +0.09%) increased 13.7% in June, according to data from S&P Global Market Intelligence. The move comes after a slew of upgrades from Wall Street analysts after the company's investor day in early June.
For obvious reasons, the COVID-19 pandemic has created uncertainty around the end market demand environment for Autodesk. After all, if the economy is set for an extended slowdown, then construction, manufacturing, and engineering companies will start to shelve projects -- not good news for Autodesk's design software sales.
Image source: Getty Images.
No matter: During the investor day event, management gave its targets for 2023. To put these numbers into context, free cash flow of $2.4 billion in 2023 would put the company on a price to free cash flow multiple of 22, based on the current market cap of $52.6 billion. That's not a bad multiple if management is correct with its estimation of a double-digit growth rate after 2023.
| Autodesk Metrics |
Fiscal 2023 Target |
|---|---|
|
Revenue compound annual growth rate |
16%-18% |
|
Non-GAAP operating margin |
40% |
|
Free cash flow |
$2.4 billion |
|
Revenue growth + free cash flow margin |
55%-65% |
Data source: Autodesk presentations.
So what
Management's projections rely on a combination of end market growth of 4%-6% and the company's specific factors, which are expected to contribute 3% to 11%. There's little Autodesk can do about the former, and investors will just have to watch the economy at large, with particular reference to construction and engineering.
However, the factors driving what management calls "Autodesk-specific factors" can be monitored closely. In a nutshell, Autodesk is shifting toward a cloud-based subscription model from a traditional license and maintenance model. It's a model that should result in growing its renewal revenue base, shifting the sales mix toward direct sales, and creating opportunities to upsell software solutions to customers. In addition, management expects the move will enable it to expand sales in its core construction and engineering markets.
Now what
Investors should keep an eye on how the company is tracking against its long-term objectives, and in particular growth in product subscriptions and recurring revenue. Now that the targets -- including the "Autodesk-specific factors' -- have been set, the market will surely start to price them into valuations. As such, Autodesk shouldn't be looked at as just a play on the growth prospects of the construction and engineering markets.
