Engineering and design software firm Autodesk (ADSK +4.69%) has a fantastic competitive advantage, otherwise known as a moat. With high switching costs and embedded usage in classrooms around the globe, the company has dominated the architecture, engineering, and construction software market for decades.
This has led to phenomenal stock returns, with shares up over 62,000% since going public in the 1980s. The company recently reported strong second-quarter results, with revenue growing 17% year over year amid a challenging macroeconomic backdrop and foreign exchange headwinds.
But the company is not resting on its laurels. Here are three ways Autodesk is widening its already strong moat and why the stock belongs in your portfolio today.
One software backend
Autodesk has dozens of products that serve a variety of end markets. These have all been acquired periodically throughout the last few decades to give Autodesk a comprehensive product offering in the various industries it targets. For example, in infrastructure and construction, it has Revit (architectural design), Civil 3D (civil engineering design), Autodesk Build (construction management software), Innovyze (water utility software), and many other programs.
Historically, all these software programs operated somewhat separately, even if the end customers worked together. Now, Autodesk plans to change that by building one technology backend to connect the dozens of products it offers. Here's CEO Andrew Anagnost on the last quarterly conference call:
It's also really difficult to uniformly deliver multi-platform support, multi-device support, cloud computing, and AI automation, which is really challenging. So what we're doing is we're moving away from this kind of disconnected portfolio of products to really a set of platforms to target each one of our industries with some underlying core technologies that support all of it.
This will be a multi-year task whose benefits may not be immediately picked up by investors. But over the long term, it should help Autodesk run its product suite seamlessly and more efficiently.
Vertical integration and interoperability
With all these acquisitions, Autodesk has now vertically integrated the software market within the industries it serves. On top of this, it is making sure each software program works well with the others in its portfolio. On the Q2 conference call, Anagnost talked at length about how the company is working to allow better data connectivity and communication through the cloud for customers across all its different software programs. With how much communication and data sharing are needed on huge construction projects, this interoperability will help widen Autodesk's advantage versus competing software providers.
Imagine you are a company trying to compete with one of Autodesk's products. If you only serve architectural design, you're going to be at a huge disadvantage selling products to customers, because your software won't be set up to work seamlessly with other constituents on a project. Even if the software program has equivalent tools, or even better tools than an Autodesk solution, customers are going to lean toward using Autodesk because of this.
NASDAQ: ADSK
Key Data Points
Bundled enterprise agreements
Lastly, Autodesk has been really smart in offering enterprise bundles for all its software programs. This is not a revolutionary concept, but is something that yet again deepens its advantage over other software providers. Management routinely highlights multi-million-dollar contracts -- and even some deals worth tens of millions of dollars -- where large construction firms buy long-term deals for all the different software programs they need. No other single company can offer all the software solutions Autodesk has, making it the probable choice for large construction companies when they need a software partner.
The best part about Autodesk is that you can buy the stock at a reasonable price right now. At a market cap of $45 billion, the stock trades at a forward price-to-free cash flow (P/FCF) of 22 based on the midpoint of its full-year guidance. With such strong competitive advantages that management is working to deepen further, the stock is an easy buy right now.
