Is Autodesk Stock a Buy Now?

Autodesk's (ADSK 0.18%) stock price jumped 10% on May 27 after the software company posted its fiscal year 2023 first-quarter results (for the period that ended April 30). Its quarterly revenue rose 18% year over year to $1.17 billion, which beat analysts' estimates by $20 million. Its adjusted earnings increased 39% to $1.43 per share, which also surpassed the consensus forecast by $0.09.

Those growth rates are impressive, but should investors chase Autodesk's post-earnings rally? 

What does Autodesk do?

Autodesk's software and services operations can be split into four categories: architecture, engineering, and construction (AEC); AutoCAD and AutoCAD LT; manufacturing (MFG); and media and entertainment (M&E).

Image source: Getty Images.

During the first quarter, it generated 44% of its revenue from its AEC segment, 30% from AutoCAD and AutoCAD LT, 19% from MFG, and 6% from M&E. It provides most of its software as cloud-based services.

Autodesk's cloud-based subscriptions enabled it to generate stable growth throughout the pandemic. Its revenue rose 16% in fiscal 2021, which ended last January, and increased another 16% to $4.39 billion in fiscal 2022. All four of its core businesses generated robust growth over the past year.

Data source: Autodesk. YOY = Year over year.

A stable outlook for the rest of the year

Autodesk's sales in Europe initially slowed down following Russia's invasion of Ukraine, which resulted in the suspension of its business in Russia on March 3, but CEO Andrew Anagnost said during the recent conference call that its business in the region recovered as the quarter progressed.

Autodesk expects its revenue to rise 15% to 17% year over year in the second quarter, and grow 13% to 15% for the full year. That outlook includes a $40 million reduction (about 3% of its revenue) from the suspension of its services in Russia.

It expects its adjusted earnings per share (EPS) to increase 27% to 32% in the second quarter, and to grow 27% to 31% for the full year.

High gross margin and rising operating margin

Autodesk's conversion of its desktop software into cloud-based services, which occurred over the past decade, boosted its gross margin above 90% on a non-GAAP (adjusted) basis. Its operating margin has also consistently expanded.

Data source: Autodesk. 

For the full year, Autodesk expects its non-GAAP operating margin to increase 400 basis points to 36%, even after factoring in the suspension of its operations in Russia.

During the conference call, CFO Debbie Clifford also reiterated Autodesk's long-term goals of generating double-digit revenue growth, non-GAAP operating margins in the 38% to 40% range, and double-digit free cash flow growth on a compound annual basis.

A wide moat with a reasonable valuation

Autodesk's AutoCAD is the gold standard of computer-aided design software and that reputation gives it a wide moat against its smaller rivals. It then leveraged that reputation to launch additional software products and lock more subscribers into its sticky cloud-based ecosystem.

That evergreen business model makes Autodesk similar to Adobe, which also converted its suite of creative software into cloud-based services over the past decade.

Autodesk is growing at a similar rate as Adobe, and both stocks trade at about 30 times forward earnings. Those multiples aren't cheap, but their resilient businesses support their premium valuations.

Is it the right time to buy Autodesk?

Autodesk lost about a quarter of its value this year as rising interest rates drove investors away from higher-growth tech stocks. However, I believe Autodesk's well-diversified business, sticky subscriptions, rising margins, and clear targets for the future still make it a rock-solid investment.