Engineering design software company Autodesk (NASDAQ:ADSK) is giving many investors one of those classic market conundrums that come up from time to time. What do you do if you really like a company's long-term prospects but are worried about its near-term guidance?

Here's a closer look at what's going on with this fascinating company.

A design engineer at work.

Image source: Getty Images.

The latest guidance

The near-term guidance I'm referring to is the target for $2.4 billion in free cash flow (FCF) in its full-year fiscal 2023. The company recently reported its fiscal 2021 fourth-quarter earnings, so the deadline for that goal is only two years away. The table below shows recent FCF results and management's guidance for fiscal 2022 and 2023.

Based on these numbers, FCF will have to increase $750 million to $825 million in fiscal 2023, a hefty sum to make up in just one year. Indeed, the Wall Street analyst consensus is for FCF to reach $2.22 billion that year. In other words, they don't think Autodesk will reach its target.

Metric

2019

2020

2021

2022 (Est.)

2023 (Est.)

Free cash flow

$310 million

$1,362 million

$1,346 million

$1,575 million
to
$1,650 million

$2,400 million

Data source: Autodesk presentations.

The situation is further complicated by the fact the current fiscal year is likely to be stronger in the back half than the first. Indeed, the market was left disappointed with the fiscal 2022 first-quarter guidance for revenue growth of just 7.8% to 9.5% year over year. Not bad at first glance, but that range is well below the full-year guidance for 13% to 15% growth.

During the earnings call, CEO Andrew Anagnost said, "As you know, new business was down last year, and that has a disproportionate impact on how we see revenue in Q1," but he expects the first quarter "will be the trough of this new business growth, and we're going to accelerate right out of that into the rest of the year."

All told, investors are being asked to buy into a stock with its near-term momentum slowing until the back half of fiscal 2022. At the same time, the large jump in FCF required between 2022 and 2023 also needs inspection.

How Autodesk can hit its guidance

That said, Autodesk certainly has a huge amount of growth potential, and management is confident the company can deliver on its guidance. As Anagnost said on the recent earnings call, "We have a lot of confidence in the buildup to FY 2023, the $2.4 billion in free cash flow, the organic metrics surrounding our business, and we also have a lot of confidence in the double-digit growth as we head beyond fiscal 2023."

Non-residential construction buildings.

A pickup in nonresidential construction spending would help Autodesk. Image source: Getty Images.

In support of this belief, Anagnost pointed out that Autodesk signed a "record number of new enterprise business agreements, or EBAs" in the fiscal fourth quarter. EBAs provide customers with access to a range of Autodesk products within a defined contract term. It stands to reason that Autodesk will have internal measures of how EBAs will translate into subscription revenue over time.

Moreover, Autodesk has a lot of exciting growth initiatives in an industry that's embracing technological developments. The company's key strategic initiatives include:

  • Accelerating digitization within its core architecture, engineering, and construction (AEC) end markets with its software and cloud-based products
  • Taking advantage of the convergence of "design and make" in manufacturing as customers seek to collaborate closer in their design development process using digital technologies
  • Monetizing non-compliant users by offering flexible models that will lead to increased subscriptions -- management highlighted 23 such deals of more than $0.5 million each in the latest quarter

Alongside these ongoing efforts, Anagnost believes deals that should have been closed in fiscal 2021 (largely in the calendar year 2020) will simply shift into its current year 2022 as the economy recovers. Throw in a potential pick-up in badly needed infrastructure spending in the U.S., and end-market conditions for design software will look even better.

Growth in fiscal 2022

With these growth drivers in place, management expects a 17% to 20% increase in billings (revenue plus the net change in deferred revenue through the period) in the current fiscal year (plus the aforementioned 13% to 15% increase in revenue).

Assuming Autodesk hits the high end of its full-year 2022 revenue guidance -- $4.345 billion -- and then grows at the high end of management's annual growth outlook (16% to 18%), revenue will reach approximately $5.13 billion in fiscal 2023. Thus, Autodesk would require a 46.8% FCF margin to reach its $2.4 billion target. Again, that looks like a stretch based on historical levels.

ADSK Free Cash Flow Chart

Data by YCharts.

What it all means to investors

Frankly, Autodesk's FCF target for fiscal 2023 looks too aggressive, and the company's heady valuation doesn't leave much room for error. On the other hand, this is an exciting business in an industry with a long growth pathway going forward. Perhaps the best answer to this conundrum is to wait and see what happens in the fiscal first quarter.

By the end of that period, Autodesk should be firmly in growth mode, and investors can track the latest management guidance -- hopefully revised upward -- before buying in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.