Is Autodesk Stock a buy?

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In past economic downturns, demand for Autodesk‘s (NASDAQ: ADSK) design software for architecture, engineering and manufacturing suffered. But 2020 is different. Not only is the coronavirus crisis creating unique challenges for organizations, but it has simultaneously created opportunities for those who have already entered a digital age. This is exactly the situation Autodesk finds itself in: Difficulties arise due to the global economic crisis, but its design software suite was already moving to a model that would make it more resilient in lean times.

The first quarter of 2020 has confirmed this, and Autodesk expects another year of strong growth to come, even in the face of adversity. It’s not exactly cheap, but this stock is a buy.

A good start to an unforgettable year

Autodesk had a good performance in 2019 as it has outperformed the stellar returns of the stock market as a whole, and while 2020 turns out to be a memorable start to the new decade for all the wrong reasons, Autodesk continued last year’s performance with a strong performance at first trimester. Revenue increased 20% year-on-year to $ 886 million, adjusted operating profit margin increased 10 percentage points to 28%, and adjusted earnings per share increased 89% to 0.85 $.

As momentum fades in the second quarter, management said it expects full-year 2020 revenue to increase 12% to 15% and adjusted earnings per share to increase by 26%. % to 40%. Expectations are lower than what was announced at the start of the year. However, some of the small businesses (10% to 15% of total revenue) for which Autodesk provides services face supply chain disruptions. The net income retention rate is also expected to fall within the 100% to 110% range (from the previous range of 110% to 120%). Many license renewals are not increasing software usage at this time, as the pandemic is causing many design companies to tighten their belts.

Nonetheless, growth is growth, and full-year forecasts are a rarity these days amid the COVID-19 situation. The numbers for a single quarter – even expectations for a full year – don’t make the stock a buy, but they attest to two things that work in Autodesk’s favor. First, the company’s design software is an integral part of the economy; and second, new billing features and tools make the software easier for users to understand when the going is going south.

Image source: Getty Images.

A flagship game for the coming decade

Digital design software for architecture, engineering, and manufacturing is nothing new, and Autodesk’s AutoCAD and related software have been around for a long time. It is the established leader in these segments, and while many projects around the world are on hold, businesses still need these basic services. So, as much of its business relies on license renewals, Autodesk is doing very well at the moment. Strategic expansion areas such as construction management and planning help form the remainder of the company’s growth profile.

But while a business based on renewing relationships with existing customers may not seem particularly exciting, Autodesk has a strong pipeline built up in this department thanks to new feature releases in recent years. Migration of clients to the cloud was particularly prescient, as working from home is now so common. And with the cloud comes the ability to work remotely as well as collaborate with team members, a tool that has become an absolute necessity in recent months.

Access to cloud software is also a more stable billing method. Autodesk continues to migrate to a subscription model versus an event-driven upgrade cycle model (think back to when you had to pay a large amount upfront for Microsoft Office compared to the monthly subscription in which it evolved). This makes ongoing payments and license renewals easier for Autodesk users, and helps the company secure new deals in areas ranging from manufacturing (a large semiconductor company was named as a new customer to the first quarter) to construction (a contractor in the Southeastern United States also signed).

But what about valuation? Trading for 31.6 times free cash flow (income minus operating expenses and capital expenses) at the time of this writing, this is hardly a valuable security. However, earnings are growing at a faster rate than the top line, meaning that the stock’s future earnings potential outweighs the 12-month valuation metrics. Expected free cash flow of $ 1.3 billion to $ 1.4 billion this year is stable from last year, but strong earnings growth is expected to pick up once the company exits mode of operation. coronavirus crisis and will resume operations as usual.

In addition to being a better way to pay for the average customer, the cloud and subscription model is driving Autodesk’s revenue growth and increased profit margin. This transition is far from over and is expected to keep the business of the company primarily focused on customer turnover on a steady increase for the foreseeable future. Add to that the increased need for remote working that the business can afford, and that gives it a marketing edge in its growing markets. Autodesk looks like a solid bet on the the future of design work in the coming decade and it’s a solid place to invest money right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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