Renowned venture capitalist Marc Andreessen famously stated that "software is eating the world" back in 2011. Over the past decade, he has been proven right time and time again, as software and technology have made their way into every part of our lives. But how can investors hop on the software train? One way could be to invest in industry giant Autodesk (ADSK -0.39%), which sells dozens of different software tools to engineers, architects, and construction workers.
Is Autodesk a stock for the long haul? Let's take a look.
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What is Autodesk?
Autodesk sells software to people who make things. This includes individuals and companies in architecture, engineering, and construction (AEC), manufacturing, utilities, infrastructure, and entertainment. The majority of its business comes from the AEC market, specifically with design tools. Last quarter (its fiscal first quarter of 2022), 73.6% of its overall sales came from these products. Within AEC, Autodesk's most popular programs are Revit, which helps people design and manage buildings, and general-purpose computer-aided design platform AutoCAD.
Outside of design, the company has products for construction management through its Autodesk Construction Cloud, manufacturing with Inventor and Fusion 360, infrastructure and civil engineering with Civil 3D and Innovyze, and media with products like Maya and Arnold. At this point, Autodesk has become a bit of a conglomerate, with its toes in many different markets.
Plenty working in its favor
The core design products should bring in consistent profits for Autodesk, but the company has other initiatives and economic trends that should help grow its business over the next decade. First, within manufacturing and mechanical engineering, Fusion 360 is growing like a weed and is looking to disrupt the market with a cloud-based platform approach. It is also undercutting most of Autodesk's competitors by coming in at a low annual price of $500 a year (most other products in this category cost at least a few thousand dollars). At quarter-end, the service had 152,000 paying subscribers. Investors should expect this number to grow substantially over the next few years.
In construction, Autodesk now has many products within its Construction Cloud to help it move downstream from design to the actual construction process. Autodesk Build is its flagship product that helps workers communicate and manage job sites more efficiently. The construction industry has been slow to adopt technology and digital products, leaving a huge opportunity for Autodesk if/when this changes over the next decade.
Economic and political trends should positively impact Autodesk's business. The infrastructure bill in the United States, which is currently allocating $715 billion to help improve transportation and water management (among other things), should boost demand for many of Autodesk's products. Outside of the United States, other nations are proposing fiscal stimulus. At a recent investor conference, an Autodesk executive estimated that 23% of all proposed stimulus spending can be attributed to industries the company serves.
So is the stock a buy?
Autodesk has a market cap of $64 billion and is guiding for around $1.6 billion in free cash flow this year. This gives it a forward price-to-free-cash-flow (P/FCF) ratio of 40. That is expensive when compared to the Nasdaq index, which has an average P/FCF below 30. However, Autodesk believes it can hit $2.4 billion in annual free cash flow by fiscal year 2023 (the calendar year 2022), which would bring its P/FCF down to 27, right around the market average.
If you believe in the potential of Fusion 360, the Autodesk Construction Cloud, and the tailwind from government stimulus around the globe, Autodesk might generate much more than $2.4 billion of free cash flow five and 10 years from now. With all of these factors taken into consideration, even with the high current P/FCF multiple, Autodesk looks like a stock for the long haul.
