The Stock Pick For May: Autodesk (NASDAQ:ADSK)

Full Report / April 28, 2022
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Founded in 1982 by John Walker and growing into one of the industry's behemoths, Autodesk (NASDAQ:ADSK) makes computer-aided design (CAD) software for engineering, construction, and architecture companies.

Autodesk (ADSK) Q4 FY2022 Highlights:

  • Revenue: $1.21 billion vs analyst estimates of $1.19 billion (1.31% beat)
  • EPS (non-GAAP): $1.50 vs analyst estimates of $1.44 (4.06% beat)
  • Revenue guidance for Q1 2023 is $1.15 billion at the midpoint, in line with analyst estimates of $1.15 billion
  • Management's revenue guidance for upcoming financial year 2023 is $5.07 billion at the midpoint, missing analyst estimates by 1.3% and predicting 15.5% growth (vs 15.6% in FY2022)
  • Free cash flow of $716.3 million, up 178% from previous quarter
  • Gross Margin (GAAP): 90.6%, down from 92.1% same quarter last year

Autodesk is best known for its flagship software, AutoCAD, which is used to design buildings, cars, and bridges. Being the first CAD software to run on PC, AutoCAD by Autodesk accelerated the shift from paper-based engineering designs to digital designs. Paper-based designs were error-prone, difficult to keep up to date and made cooperation between teams hard. Autodesk and its collection of design tools have made these problems a thing of the past. AutoCAD not only makes edits easy but also allows designers and architects to create a library of components that can be reused later, making the design process much more efficient.

Today, even after 40 years, the software is still an essential go-to tool for a number of industries and its functionality has expanded far beyond its original scope, for example it comes with built-in tools that can analyze and remedy weaknesses in a building’s design. Autodesk also makes software for the entertainment and gaming industries. One of the tools, Maya, is a 3D animation software that is used to add special effects to video games and movies, and was essential in making movies such as Avatar, The Matrix, and Spider-Man.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games or interactive movies.

It is worth highlighting the competition in the design software space, which includes players such as Dassault Systèmes (OTC:DASTY), Adobe (NASDAQ:ADBE), Ansys (NASDAQ:ANSS), PTC (NASDAQ:PTC), and Bentley Systems (NASDAQ:BSY).

Sales Growth

As you can see below, Autodesk's revenue growth has been steady over the last year, growing from quarterly revenue of $1.03 billion, to $1.21 billion.

Autodesk Total Revenue

This quarter, Autodesk's quarterly revenue was once again up 16.5% year on year. We can see that the company increased revenue by $85.8 million quarter on quarter. That's a solid improvement on the $66.1 million increase in Q3 2022, so shareholders should appreciate the acceleration of growth.

Guidance for the next quarter indicates Autodesk is expecting revenue to grow 16.4% year on year to $1.15 billion, improving on the 11.6% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $5.07 billion at the midpoint, growing 15.5% compared to 15.6% increase in FY2022.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Autodesk's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 90.6% in Q4.

Autodesk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.90 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Autodesk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Autodesk is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Autodesk's free cash flow came in at $716.3 million in Q4, up 12.9% year on year.

Autodesk Free Cash Flow

Autodesk has generated $1.47 billion in free cash flow over the last twelve months, an impressive 33.6% of revenues. This robust FCF margin is a result of Autodesk asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Autodesk's Q4 Results

With a market capitalization of $45.9 billion, more than $1.76 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We liked to see that Autodesk guided for revenue growth next year to continue. And we were also happy to see it topped analysts’ revenue expectations this quarter, even if just narrowly. On the other hand, Autodesk's revenue guidance for the full year slightly missed analyst's expectations. Autodesk is changing how it invoices enterprise customers as it is moving towards the more profitable SaaS model, and that is putting some short term pressure on the numbers. Overall, this quarter's results were decent, showing the company is staying on target. The company is up 1.77% on the results and currently trades at $222 per share.

Is Now The Time?

When considering Autodesk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Autodesk is a great business. Its revenue growth has been steady, and that growth rate is expected to increase in the short term. Its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

Autodesk's price to sales ratio based on the next twelve months is 9.4x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. Looking at the tech landscape today, Autodesk's qualities really stand out. We'd argue more mature tech businesses are sometimes underestimated because they aren't growing quite as quickly as the hottest stocks, and we really like the stock at this price.

The Wall St analysts covering the company had a one year price target of $314.2 per share right before these results, implying that they saw upside in buying Autodesk even in the short term.

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