Autodesk's (ADSK 0.04%) stock tumbled 6% on Nov. 23 in response to its latest earnings report. For the third quarter of its fiscal 2023 (ended on Oct. 31), the software company's revenue rose 14% year over year to $1.28 billion and matched analysts' expectations. Its adjusted earnings increased 27% to $1.70 per share and also met the consensus forecast.

For the fourth quarter, Autodesk expects its revenue to rise 8% to 9% year over year and for its adjusted EPS to grow 18% to 22%. Wall Street had expected its revenue and adjusted EPS to rise 10% and 22%, respectively.

Autodesk's headline numbers weren't disastrous, but they failed to reverse the stock's decline of more than 30% over the past 12 months. Let's see why investors ditched Autodesk -- and if it they're likely to turn bullish again next year.

Two architects discuss a building design.

Image source: Getty Images.

Why is Autodesk's growth cooling off?

Autodesk splits its software portfolio into four categories: Architecture, Engineering, and Construction (AEC); AutoCAD and AutoCAD LT; Manufacturing (MFG); and Media and Entertainment (M&E). Its business remained resilient throughout the pandemic for two reasons. It provides mission-critical software for most of those markets, which naturally insulates it from the competition; and it locks in its users with sticky cloud-based subscriptions.

During the third quarter, Autodesk generated 45% of its revenue from the AEC segment, 28% from AutoCAD, 20% from MFG, and 6% from the M&E division. But as the following table illustrates, the year-over-year growth of its three largest segments all decelerated significantly from the second quarter.

Segment

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

AEC Revenue Growth (YOY)

22%

17%

17%

18%

13%

AutoCAD Revenue Growth (YOY)

14%

20%

21%

13%

10%

MFG Revenue Growth (YOY)

16%

4%

14%

16%

13%

M&E Revenue Growth (YOY)

17%

38%

24%

20%

24%

Total Revenue Growth (YOY)

18%

17%

18%

17%

14%

Data source: Autodesk. YOY = Year-over-year.

Autodesk attributed that slowdown to macroeconomic and COVID-related headwinds, a higher mix of shorter-term annual contracts as opposed to multi-year contracts (which require bigger upfront payments) amid all that uncertainty, and tough currency headwinds.

Its sluggish growth in Europe -- which had been rocked by the economic shockwaves of the Russo-Ukrainian war over the past year -- has also been offsetting its stronger growth in the U.S. and Asia.

During the conference call, CFO Debbie Clifford said Autodesk's core business remained strong with "resilient subscription renewal rates, healthy new business growth, and a strong competitive performance." However, its forecast for the fourth quarter indicates that the slowdown will continue.

For the full year, Autodesk expects its revenue to rise approximately 14%, compared to its 16% in both fiscal 2022 and fiscal 2021. That slowdown seems mild, but analysts expect just 10% growth in fiscal 2024.

What are Autodesk's near-term plans?

As Autodesk's top-line growth cools off, it's focusing on renewing its subscriptions, maintaining its pricing power, and reining in its spending. Its net revenue retention rate remained between 100% and 110% in the third quarter, so it's still clearly locking in its users with renewals, while its adjusted gross margin expanded by a percentage point year over year and sequentially to 93% -- which indicates it has plenty of pricing power in its core markets.

As for its adjusted operating margin, it stayed flat sequentially but improved four percentage points year over year to 36% in the third quarter. For the full year, Autodesk expects its adjusted operating margin to expand four percentage points year over year to 36%, and for that expansion to boost its adjusted EPS 29% to 31%. Analysts expect its adjusted earnings to increase 30% this year, but to grow just 12% in fiscal 2024 as its revenue growth decelerates.

Will Autodesk's stock bounce back next year?

Autodesk doesn't plan to provide a clearer outlook for fiscal 2024 until it reports its fourth-quarter earnings. But during the conference call, CEO Andrew Anagnost predicted the lower-end market could remain soft next year as the macro issues dragged on, but that its retention rates would hold steady.

The company is still growing, but its stock isn't particularly cheap at 27 times forward earnings. By comparison, its industry peer Adobe (ADBE -0.25%) -- which faces many of the same headwinds but spooked the bulls with its plans to buy Figma for $20 billion earlier this year -- trades at 21 times forward earnings.

Therefore, Autodesk's stock seems reasonably valued right now -- and its year-to-date decline merely cleared away the froth that had accumulated during the feverish rally in growth stocks last year. I don't think Autodesk's stock will decline much further, but I also don't think it will rally significantly over the next 12 months unless the macro situation improves.