Is Autodesk Stock a Buy?

Autodesk's (ADSK -1.06%) stock plunged 15% on Nov. 24 after the design software maker posted its third-quarter earnings report.

Its revenue rose 18% year-over-year to $1.13 billion, which beat estimates by $10 million. Its adjusted earnings grew 28% to $1.33 per share, which also topped expectations by seven cents.

Autodesk's headline numbers looked healthy, but its profit guidance for the fourth quarter slightly missed analysts' expectations. Did the market overreact and create an attractive buying opportunity?

Image source: Getty Images.

Its core businesses are still growing

Autodesk organizes its software portfolio into four main segments: AEC (Architecture, Engineering, and Construction), AutoCAD and AutoCAD LT, MFG (Manufacturing), and M&E (Media and Entertainment).

During the third quarter, it generated 45% of its revenue from the AEC segment, 28% from the AutoCAD segment, 20% from the MFG segment, and 6% from the M&E segment. All four segments have generated accelerating year-over-year growth over the past two quarters:

Source: Autodesk. YOY = Year-over-year.

Autodesk's businesses remained resilient throughout the pandemic because it had previously transformed its desktop software into cloud-based subscription services. That strategy, which closely mirrors Adobe's (ADBE 1.05%) transformation of its creative software into cloud-based services, locked in Autodesk's customers with sticky subscriptions.

Just as Adobe's suite of creative software services are considered indispensable to many graphic designers and media professionals, Autodesk's software products are considered industry-standard tools for architects, engineers, designers, and other professionals. That "best in breed" reputation gives it a wide moat with plenty of pricing power.

That pricing power and tighter cost controls boosted its adjusted operating margin year-over-year -- from 29% to 31% -- in the first nine months of fiscal 2022. It also expects to post an adjusted operating margin of approximately 31% for the full year, compared to 29% in fiscal 2021.

Was Autodesk's guidance that bad?

Autodesk expects that growth to continue. CFO Debbie Clifford said the market's "demand was robust" throughout the third quarter, and should "remain so" in the fourth quarter.

However, the midpoints of Autodesk's revenue and earnings guidance for the fourth quarter slightly missed Wall Street's expectations, even though its full-year guidance still matched their estimates:

Source: Autodesk.

Clifford attributed its slowdown in the fourth quarter to the "supply chain disruption and resulting inflationary pressures, a global labor shortage, and the ebb and flow of COVID."

Those near-term challenges might have disappointed some investors who had expected Autodesk to be more resistant to macro headwinds, but its 15% post-earnings drop seemed to be a severe overreaction.

It's all about the valuations

Autodesk's core business looks fine, but its valuations had gotten a bit overheated. Even after its latest decline, the stock still trades at about 43 times forward earnings and 13 times next year's sales.

Adobe, which will likely generate stronger sales and earnings growth than Autodesk this year, trades at 47 times forward earnings and 18 times next year's sales. Therefore, Autodesk's sell-off merely reset its valuations to more reasonable levels and doesn't suggest the company is actually in trouble.

Nonetheless, inflationary pressures could still reduce the market's appetite for tech stocks with higher valuations. As a result, Autodesk, Adobe, and other similar tech stocks could struggle to gain ground until those headwinds wane.

Is it the right time to buy Autodesk?

Autodesk's stock has risen nearly 20% over the past 12 months, but it's underperformed the S&P 500's gain of nearly 30%.

I expect it to continue to underperform the market as its near-term headwinds and high valuations keep investors on the sidelines. Autodesk is still a decent long-term investment, but I'd personally rather buy other tech stocks with more upside potential than this market laggard.