In 2011, renowned venture capitalist Marc Andreessen made the claim that "software is eating the world." Over the last 10 years, this vision has been realized, with software and digital tools continuing to penetrate our daily lives. Perhaps no company was better suited to ride this tailwind than Autodesk (ADSK 0.71%), a leader in design and engineering software solutions. The company just put out its latest earnings report and continues to put up strong growth numbers. However, in spite of this strong growth, the stock is off 20% over the last year along with the recent broad sell-off in growth stocks, providing a chance for investors to buy shares at a discount.
Here are three reasons to buy Autodesk stock right now.
Image source: Getty Images.
1. Core business with durable tailwinds
Autodesk sells dozens of different software programs serving multiple industries including architecture, construction, engineering, manufacturing, and media. The majority of its revenue comes from its architecture, engineering, and construction (AEC) segment and its legacy AutoCAD business. In the fourth-quarter fiscal year 2022 report, Autodesk's latest earnings covering the three months ending in January, the two segments made up 72% of the company's overall revenue.
Within AEC, growth is driven by one software program: Revit. Why is Revit so important? Because it is the dominant software program for building information modeling (BIM) around the world. BIM is an architectural and design standard that helps companies develop and analyze buildings with 3D software. Many countries and industry groups are requiring or nudging companies to use BIM within their construction projects, which is forcing them to buy software programs like Revit that support the standard. Autodesk has an estimated 70% share of the BIM market, so it should continue to capture the majority of this spending.
The BIM transition has been going on for the last 10 to 20 years, but still has a long runway to grow. According to Autodesk's research, no country around the world has 50% BIM penetration on construction projects. With government mandates and industry participants forcing a migration to the 3D modeling standard, BIM penetration should slowly rise around the globe over the next decade. This provides a durable tailwind for Autodesk's business.
2. Optionality with new software platforms
Revit and AutoCAD are the core drivers of Autodesk's business right now, but the company has ambitions to become much more than just the leader in architectural design software. The two most promising products right now are Fusion 360 and the Autodesk Construction Cloud (ACC).
Fusion 360 is a product design platform for mechanical engineers, electrical engineers, and manufacturers. Unlike the legacy computer-aided design (CAD) platforms, Fusion 360 is cloud-native and at a much cheaper entry price point of around $500 a year (this is very cheap for engineering software). It also employs a novel extensions strategy, which means that instead of bundling all of its solutions together, it allows customers to only pay for the software programs they want or need. This flexible solution has helped Fusion 360 subscribers grow rapidly over the last few years. At the end of last quarter, the platform had 189,000 subscribers, up around 100% year over year. The segment is not material to Autodesk's business right now, but if it continues growing at a rapid pace, it will become a much larger part of Autodesk's business three to five years from now.
The ACC is in a much earlier stage than Fusion 360, having only launched in late 2019, but has a promising future as a part of Autodesk's business. The ACC is a collection of software tools for companies that actually construct buildings, like general contractors, subcontractors, and building owners. Its core product, Autodesk Build, helps with project management and communication on the job site, putting everything onto a cloud-native platform. Like Fusion 360, the ACC is immaterial to Autodesk's business right now. But on the Q4 conference call, CEO Andrew Anagnost said the segment accelerated growth in Q4 and that he thinks it is Autodesk's next billion-dollar business. With how big the construction market is around the world, this should have investors excited about Autodesk's prospects with these new software tools.
3. Cheap valuation relative to peers
Lastly, investors should take a look at Autodesk because of the stock's cheap valuation compared to its Nasdaq peers. In fiscal year 2023, Autodesk management is guiding for approximately $2.17 billion in free cash flow. With a market cap of $48.5 billion, this means Autodesk has a forward price-to-free-cash-flow (P/FCF) of 22. The Nasdaq Composite trades at a P/FCF of 30. Yes, this is a trailing multiple, but to me it shows the valuation divide between Autodesk and the average technology stock right now.
Given its clear path to growing its core business, plenty of optionality with Fusion 360 and the ACC, plus a cheap valuation, now is a perfect time for investors to take a position in Autodesk.
