It's fair to say that it's not been the year that most investors in PTC (PTC 1.21%) and Autodesk (ADSK -0.73%) hoped it would be. Both stocks are in negative territory in 2021, and their earnings and outlooks have generally failed to live up to the optimism built earlier in the year. The stock price falls leave them both looking attractive, but which is the better buy right now? Here's the lowdown.
Autodesk: The goalpost appears to be moving
Rightly or wrongly, investors often make decisions based on company guidance. In Autodesk's case, management has a long-held target for $2.4 billion in free cash flow (FCF) in fiscal 2023. As a reminder, Autodesk's recent earnings were for its third quarter of 2022, so 2023 guidance reflects how the company will perform next calendar year.
There's long been a debate around the guidance, with the bears suggesting it's too aggressive and the bulls taking heart from management's confidence in it. Unfortunately, matters were complicated in September when management told investors FCF would dip in fiscal 2024 due to a revision to its billing strategy. In addition, Autodesk plans to grant fewer upfront discounts for customers in favor of multi-year deals with fewer discounts in 2024, so some FCF will get pushed out.
The change is not necessarily bad, but it does raise some uncertainty on FCF. Roll on to November, when management warned of the risk of a $100 million to $200 million shortfall to the FCF target due to customers suffering from cost increases and supply shortages. That's the last thing investors wanted to hear.
That said, if the worst that happens is a $200 million shortfall, then the $2.2 billion in FCF in fiscal 2023 would put Autodesk on a price to FCF multiple of less than 26 times 2026 FCF. That's a decent multiple for a stock growing revenue at a mid-teens rate. While it's somewhat disappointing to see such changes to guidance expectations, it's also essential to keep a clear head and judge an investment based on the circumstances. Autodesk is starting to look attractive now.
PTC: on track
The company competes with Autodesk in computer-aided design (CAD) software, but the real excitement in the company came from its growth products, namely the internet of things (IoT) and augmented reality (AR) software. In a nutshell, PTC's IoT solutions connect asset owners' physical assets with the digital world, so they can be digitally monitored, modeled, and managed to improve their performance. In addition, AR helps technicians better service equipment with digital tools and even allows for servicing without the technician being present.
PTC's growth products are exciting, but unfortunately, despite a strong recovery in the industrial sector in 2021, PTC's growth products (mainly IoT for now) growth has been a bit weaker than expected this year. Of course, that's not what growth investors want to hear; after all, growth stocks are priced with their future earnings and FCF expectations in mind.
Moreover, PTC's management recently told investors it would accelerate the transition of its products to software as a service (SaaS) model with its core products, namely CAD and product lifecycle management (PLM) software, as that's where the industry is heading anyway. However, these actions will result in a $50 million to $55 million outflow in 2022, meaning FCF guidance for 2022 is only $400 million.
Just as with Autodesk, investors have been pricing in PTC stock based on hitting an FCF target -- in this case, $700 million to $750 million in 2024. However, the slightly disappointing product performance in 2021 and the risk around the SaaS transition execution call those figures into question.
Carrying on with the same logic as Autodesk above, Wall Street analysts have PTC hitting management's guidance for $400 million in FCF in 2022, then $540 million in 2023, and then the high end of management's guidance ($750 million) in 2024.
Based on those figures, PTC trades on 33 times FCF in 2022 -- the best comparable to the Autodesk fiscal 2023 figure of 26 times FCF outlined above. However, based on the forecasts, this will drop to 24 times in 2023 and then (using the low end of the range of $700 million to $750 million) to just 18.7 times FCF in 2024.
Which stock is a better buy?
Nothing is stopping you from buying both stocks, as they both look attractive. However, if forced to choose, PTC looks like the better buy. Its comparable valuation is superficially higher, but after 2022 its FCF should start to increase. In comparison, management expects Autodesk's FCF to dip in fiscal 2024 for strategic reasons discussed above. That's an added layer of uncertainty to go with the doubt around its fiscal 2023 FCF guidance. As such, PTC looks better.