What happened
Shares in engineering design software company Autodesk (ADSK -1.34%) rose 11.4% in October, according to data from S&P Global Market Intelligence. The move comes after a change in sentiment over the stock after an investor relations presentation on Oct. 7. In a nutshell, management's outlining of its strategic planning for its construction, and design and manufacturing end markets won over investors who may have been skeptical.
There is little debate over whether Autodesk is a long-term growth stock. Instead, the bull and bear battle has long centered on its near-term guidance, precisely management's target for free cash flow (FCF) of $2.4 billion in its fiscal 2023. For reference, Autodesk's fiscal year ends on Jan. 31, so it is currently in the fourth quarter of its fiscal 2022.
The market may doubt the target because the guidance for full-year FCF in 2022 is $1.5 billion to $1.575 billion, implying growth of $825 million to $900 million in 2023 alone. Moreover, Autodesk will have to generate an FCF margin of above 45% in 2023 based on analyst revenue forecasts for $5.2 billion in revenue in 2023 to get there.
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The stock took a hit in August after a weaker-than-expected set of second-quarter earnings. The negative sentiment continued in September after its investor day presentation, where management said FCF would dip in 2024 due to the company revising its billing strategy. Autodesk decided to switch from offering discounts for upfront payment for multi-year deals in favor of receiving annual payments but with a smaller discount. This has the effect of pushing out revenue after initial implementation.
Given this development, it's not surprising that the market took a cynical, if short-term, view on Autodesk's FCF prospects. A skeptic could argue that Autodesk may be offering discounts to frontload FCF to make the 2023 FCF target.
Image source: Getty Images.
The stock sold off in August and September, but fortunately, the presentation in early October appears to have refocused investors on the long-term development of the business.
So what
In the end, the debate around the stock is really about sentiment. If you believe in the company's long-term prospects, the near-term hit to FCF in 2024 will be taken in stride. After all, there's nothing wrong with a company maximizing long-term revenue and FCF generation by taking action resulting in a push out of near-term FCF. The October presentation helped to highlight that fact.
Now what
All investors like to see their long-term convictions given strength by the company's hitting waypoints in time. As such, all eyes will be on the third-quarter earnings released on Nov. 24. Management needs to confirm fiscal 2022 guidance, reiterate 2023 FCF guidance, and then provide evidence of subscriber growth and customer adoption of its strategic initiatives.
