Some software products are critical in the daily jobs of many workers. Take Autodesk (ADSK 0.65%), for example. Architects and engineers utilize its software daily to create drawings and design products. Without it, they couldn't do their jobs effectively.
I like to invest in these types of companies as users cannot afford to cut their subscriptions just because times are tough. As another boost for Autodesk, its stock is undervalued in my opinion, and management's latest action affirms this assessment.
An aggressive buyback plan
Autodesk recently reported results for the third quarter of its fiscal 2023 (ended Oct. 31), and with it came a huge announcement. The board of directors approved a $5 billion share repurchase plan. For context, Autodesk's current market capitalization is $42.6 billion, so this would reduce the outstanding shares by around 12% at today's price. But that's not the complete picture.
Stock-based compensation adds to the share count quarterly, so it must be considered. In the first nine months of its current fiscal year, Autodesk paid $493 million in stock-based compensation. Extrapolating from last year, it looks like this fiscal year's total stock-based compensation will be about $657 million.
With the company on pace to buy back around $1.2 billion in stock this year, that means about half of Autodesk's repurchases will go to retiring shares instead of offsetting compensation, indicating a reduction in shares outstanding of about 6%, still a respectable level. Management is also talking about "accelerating repurchases opportunistically."
This all leads me to think the stock is undervalued. But is it?
Autodesk's valuation is reasonable
In Q3, Autodesk's revenue rose 14% to $1.28 billion, and it converted 36% of revenue into free cash flow. Unlike many companies, Autodesk's operating margin rose in the quarter, showing it knows how to control its expenses.
In its Q3 earnings release, Autodesk gave full-year guidance of $1.94 billion in free cash flow, pricing Autodesk shares at 22 times free cash flow. Taking the inverse of this metric is the free-cash-flow yield, which is often compared to the rate of a 10-year Treasury note. With that investment yielding 3.83% currently versus Autodesk's 4.6%, Autodesk is a reasonably valued stock.
Revenue guidance for Q4 was a bit conservative with only 8% growth expected. However, management stated its long-term goal is still double-digit revenue and free-cash-flow growth annually.
Autodesk also has significant global exposure.
| Region | Revenue Makeup | YOY Growth |
|---|---|---|
| Americas | 42.3% | 17% |
| Europe, Middle East, and Africa | 37.2% | 10% |
| Asia Pacific | 20.5% | 14% |
Data source: Autodesk. YOY = year-over-year.
This can cut both ways as Autodesk is seeing strong new business growth in North America but weakness in Russia and China. Global diversification can help stabilize the company if the U.S. heads into a recession next year. Overall, Autodesk is a very balanced company with a strong global presence.
Autodesk's products are both useful and required for many businesses. Without them, buildings couldn't be designed, and parts couldn't be made. Couple this necessity with a reasonably valued stock price, and I think Autodesk is primed to outperform the markets in 2023 and beyond. Autodesk is an outstanding stock to balance out high-fliers in your portfolio, and investors should take advantage of its low stock price today.
