After the closing bell on Nov. 23, Autodesk (NASDAQ:ADSK) released its earnings report for the three months ending Oct. 31. The company, which sells software to engineers, designers, construction workers, and architects, reported strong growth for the quarter but ended up reducing its full-year free cash flow guidance because of foreign currency and supply chain headwinds. This caused the stock price to drop 17% the day after the announcement. 

After this recent sell-off, Autodesk's stock price is now down 25% in the last three months. Does that make the stock a buy? Let's take a look.

Two construction workers talking.

Image source: Getty Images.

Q3 results show billings are up 16% year over year

In the third quarter, Autodesk's revenue grew 18% year over year to $1.23 billion. On its face, this looks like strong growth, especially for a business of this size. But since Autodesk is forced to defer a lot of its revenue coming from long-term contracts, revenue can be a bit backward-looking when analyzing its top-line growth. Billings, which is a metric evaluating the actual dollars collected from customers, is more useful in this regard.

Billings in Q3 grew 16% year over year to $1.17 billion, which is solid growth. However, this was a big slowdown from the second quarter of this year, when billings grew 29% year over year. This slowdown in billings growth is what management was talking about when it reduced Autodesk's free cash flow guidance for the full fiscal year (which ends in January 2022). After Q2 earnings, management guided for $1.5 billion to $1.58 billion in full-year free cash flow. This quarter, that was reduced to $1.42 billion-$1.46 billion.

Given that investors have high expectations for Autodesk's free cash flow growth in the coming years, this guidance reduction was likely the big reason why Autodesk's stock dropped so much after the results. It doesn't mean the business is in peril, but it is facing some currency and supply chain headwinds (if its customers can't get physical goods, there's no reason to pay for software products) right now.

Growth opportunities look promising

The biggest growth driver for Autodesk in Q3 was its architecture, engineering, and construction (AEC) collection, which grew revenue 22% year over year to $511 million. The majority of AEC's revenue comes from Revit. Revit is a design software platform for architects that follows building information modeling (BIM) standards, which are getting adopted by governments around the globe. With high switching costs because of how long it takes to learn the software coupled with these government mandates, Revit has a clear path to growth over the next decade.

On top of Revit, Autodesk is expanding deeper in the construction industry with its recently launched Autodesk Construction Cloud (ACC). The ACC is for construction general contractors and other companies actually working at construction sites, hopefully connecting the designs made in Revit to the real world. Its core product is Autodesk Build, a project management platform that helps workers communicate, send documents, and do financials all from a digital application. It is still early days for the ACC, but with tens of millions of construction workers around the world, there is a huge opportunity for this division to grow in the coming years.

Lastly, Autodesk gave a nice update on Fusion 360, its mechanical, electrical, and manufacturing engineering platform that is gaining rapid adoption within its respective industries. Fusion 360 now has 175,000 paying customers, up 45.8% year over year. The platform is cloud-based and offers tons of flexibility for different industry extensions, making it a lot more user-friendly than legacy mechanical design platforms. On the earnings conference call, management said that monthly active users (MAUs) of Fusion 360 crossed 1 million and are growing 50% year over year. As you can see, a lot of these users are not paying customers right now, but these MAUs provide an easy funnel for Autodesk to grow the Fusion 360 business over the next decade.

What about the valuation?

Autodesk's stock price is down 25% in the past three months. At a price of $254 a share, the stock has a market cap of $56 billion. With guidance for next year's free cash flow to hit $2.4 billion, Autodesk has a forward price-to-free cash flow (P/FCF) ratio of 23. It is not guaranteed that Autodesk will hit this number, and if the company misses or beats it by a little bit, the long-term trajectory of the business won't be materially affected.

If you believe in the continued adoption of BIM, the growth of the ACC and Fusion 360, plus Autodesk's other core products, then the company is set to grow earnings and revenue at a double-digit rate for the foreseeable future. On a long enough time frame, the stock price will likely follow suit.

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.