Engineering design software provider Autodesk (ADSK +2.41%) is one of the fascinating investment propositions on the market. It's a stock that looks likely to reward investors over the long term, but anyone buying in must be aware it will take time for the company's full potential to shine through in the numbers. Here are some of the red and green flags waving around Autodesk simultaneously.
Expectations
No one likes it when a company they invest in continues to lower its earnings projections, and Autodesk's investors are no different. The company's guidance, particularly for fiscal 2023 -- the current fiscal year, which will end in January -- has long been a battleground among investors.
NASDAQ: ADSK
Key Data Points
The debate long centered on management's previous guidance for $2.4 billion in free cash flow (FCF) for fiscal 2023. This represented a significant step up from both the $1.35 billion reported in 2021 and the original guidance for $1.575 billion to $1.65 billion in 2022.
However, Autodesk missed its original guidance estimate for 2022 FCF (reporting just $1.48 billion), and its FCF guidance for 2023 now stands at $2 billion to $2.08 billion.
What the market thinks about Autodesk
To flesh out what Wall Street now expects from Autodesk, here's a look at consensus forecasts for earnings and FCF.
There are a couple of things to note here. First, the market's FCF estimate for 2023 ($2.04 billion) is bang in the middle of management's guidance range, but it's notably lower than the previous target of $2.4 billion.
Second, FCF is set to dip in FY 2024 due to management's revising its billing strategy for larger clients. In a nutshell, Autodesk will reduce its discounts for up-front payments in favor of multiyear deals. This has the effect of lowering revenue and FCF in the year of implementation but possibly raising long-term revenue and FCF generation. It's not a significant issue in itself, but note that based on these numbers, Autodesk's price-to-FCF multiple based on the current price will expand to 21 in 2024, even though revenue and earnings are still increasing.
|
Metric |
2020 |
2021 |
2022 |
2023 (Estimated) |
2024 (Estimated) |
2025 (Estimated) |
|---|---|---|---|---|---|---|
|
Revenue |
$3.27 billion |
$3.79 billion |
$4.39 billion |
$5.02 billion |
$5.72 billion |
$6.51 billion |
|
Earnings before interest, taxes, depreciation, and amortization |
$0.86 billion |
$1.17 billion |
$1.45 billion |
$1.9 billion |
$2.23 billion |
$2.63 billion |
|
Free cash flow |
$1.36 billion |
$1.35 billion |
$1.48 billion |
$2.04 billion |
$1.81 billion |
$2.24 billion |
|
Price to free cash flow |
28.4 |
28.6 |
26.1 |
18.9 |
21.3 |
17.2 |
Data source: marketscreener.com.
Moreover, Autodesk's revenue growth will likely slow if the economy slows. After all, its architecture, engineering, construction, and manufacturing customers are all in sectors that are sensitive to interest rates. If the fears of an economic slowdown prove valid, then don't be surprised if Autodesk lowers its full-year guidance.
Is the stock worth buying?
As I said above, investors buying shares of Autodesk will need to tolerate near-term risk around its earnings. Moreover, the optics on FCF growth will be clouded by the artificially induced slowdown in fiscal 2024.
On the other hand, Autodesk is still seeing revenue grow in the double digits and has plenty of growth drivers, including digitization within its core products. Using digital technology, developers can collaborate better in the design development and "make and build" process. These technologies include its cloud construction initiatives and its 3D modeling software. In addition, there's an opportunity to convert customers over time to these products.
Moreover, Autodesk's implied valuations set out in the table above are not expensive for a growth stock, and even with a slight reduction in guidance for 2023, you can still make a strong case for buying shares. However, be aware you will have to wait a few years before the stock starts to look like a great value again, and the near-term risk is rising.
