The developments at engineering design software company Autodesk (ADSK -1.34%) somehow represent many difficulties that growth investors face in 2022. On the one hand, the stock has fallen significantly. On the other, its near-term growth prospects are at risk, which creates some doubt around the company's guidance. So what to make of it all? Is the stock now a great value opportunity or a value trap?
What happened to Autodesk over the last year
It's been a challenging year for Autodesk investors. Around the spring of 2021, hopes were high that the booing economy would lead to the company easily meeting its fiscal 2022 and fiscal 2023 guidance. To avoid confusion, I should add that Autodesk finishes its fiscal year on Jan. 31, so its recently reported fourth-quarter results are for the full-year 2022.
I will focus on its free cash flow (FCF) guidance in this article for reference. Autodesk started its fiscal 2022 forecasting $1.575 billion to $1.65 billion in FCF for 2022, rising to $2.4 billion in fiscal 2023. As noted last year, these targets always looked aggressive, as they imply a big jump in FCF between 2022 and 2023 with very high FCF margins.
Unfortunately, Autodesk did not meet its initial 2022 guidance, and its management has been forced to lower expectations for 2023. It gets worse, at least it gets worse for investors who fret about near-term numbers over long-term business development. In September, management informed investors that FCF would dip in fiscal 2024 because Autodesk is revising its billing strategy. Instead of offering discounts for multiyear deals and receiving upfront payments, Autodesk is shifting to receiving annual payments with fewer discounts. The move may make sense for the business in the long term, but it will push out revenue from fiscal 2024.
In a nutshell, through the last year, investors have had to cut their FCF estimates for fiscal 2022, 2023, and 2024.
Image source: Getty Images.
Deteriorating momentum
An example of the deteriorating momentum came from the third-quarter earnings call when CFO Debbie Clifford told investors that management continued to target $2.4 billion in FCF for fiscal 2023. Still, there was a $100 million to $200 million downside risk given current market conditions. Fast forward to the fourth-quarter 2022 earnings release at the end of February, and management guided toward $2.13 billion to $2.21 billion in FCF.
Clifford was asked about the matter during the earnings call and said the $200 million downside "risk" (comprising an equal split between a worse-than-expected macroeconomic environment and unfavorable foreign exchange movements) had come through with an additional unfavorable $30 million movement in foreign exchange on top.
Still a growth company
That said, Autodesk is still an excellent growth stock candidate. The case for buying the stock rests on the company's ability to grow revenue over the long term thanks to the increasing adoption of digital technology, allowing customers to design and build (architecture, engineering, and construction) and design and make (manufacturing).
As such, designers, contractors, and users can better collaborate over projects in the cloud to ensure timely and efficient completion of construction activity, and manufacturers can create connected factories that operate more efficiently.
Putting aside the downgrades to FCF guidance and the coming dip in FCF in fiscal 2024, Clifford still believes Autodesk will generate "double-digit revenue growth through fiscal '26" and "double-digit compound annual growth in free cash flow through fiscal '26."
You could build a case for buying the stock based on its long-term double-digit FCF prospects and the fact that it trades on less than 21 times the midpoint of management's guidance for FCF in fiscal 2023.
Image source: Getty Images.
Is Autodesk a buy?
It's a compelling argument, but the problem is, once again, there's a real risk to Autodesk's earnings guidance. To be fair, most of the market has headline risk exposure to rising interest rates, so Autodesk is definitely not alone here. However, if inflation continues to rise, interest rates will likely move higher -- not good news for construction activity or manufacturing investment.
In Autodesk's specific case, given the pattern of disappointments on guidance over the last year, the last thing investors want to see right now is another downgrade to expectations. So it probably makes a bit more sense to be a little patient and monitor events before buying into what is undoubtedly an attractive long-term growth story.
