Autodesk Stock Coverage (Buy)
Autodesk ($ADSK)
Rating: Buy (not investment advice)
Equity Research
Robert Ota (June 11, 2021)
Investment Thesis:
Autodesk’s cash flows are extremely predictable (and stable), and likely to grow in regards to earnings speed and acceleration (beats and raises).
This view is held due to the company’s monopolistic moat, positive macroeconomic outlook, opinions of industry insiders and proven cross selling capabilities.
Company Overview:
“Autodesk, Inc. (“Autodesk” or the “Company”) is a world leading design software and services company, offering customers productive business solutions through powerful technology products and services. The Company serves customers in the architecture, engineering, and construction; manufacturing; and digital media, consumer, and entertainment industries.”
Autodesk operates under a saas business model, charging customers on an ‘a la carte’ basis.
Financial Performance/ Valuation:
The company posted earnings of $5.51/share for fy 2021. This EPS is dramatically overstated due to a one off $661.5M income tax benefit inflating EPS by $3.01. When we remove this one off income line item, we get an operational EPS of $2.50.
For our DCF model, we will use sales as the driver and relate the other line items as a % of sales. The company had its best fiscal year performance across income statement line items (Cost of Revenue, Marketing and Sales & General and Administrative) when expressed as % of sales. As top line revenue continues to grow, we are likely to see the relational line items continue to decrease as a % of sales due to the scalable cloud subscription business. Because of this, our DCF model projections conservatively use the most recent year’s relational percentages.
Top line revenue grew 16% y/y in 2021. Slower than growth in 2019 and 2020 of 25% and 27% respectively. This is likely a result of contractionary spending from their customers due to Covid-19. For our model, we grow revenue at 22% y/y. Based on a NR3 rate (Net Revenue Retention) 110%-120%, conversion of customers to cloud, return to pre-covid demand and macroeconomic catalysts, we believe that this topline growth rate is very conservative.
- Financial Metrics
* Data used attached to back
For the financial comparison, we will be comparing Autodesk against competitors Bentley Systems, Ansys and Adobe. Autodesk competes directly with Bentley System and Ansys. Adobe is not a direct competitor, but is positioned similarly to Autodesk in another industry in regards to moat strength and service-to-cloud restructuring stage.
Autodesk boasts the highest ROE, ROIC and lowest EV/Sales across industry competitors. However, the stock has a high P/E ratio and low ROA.
Macroeconomic outlook:
With the massive $2 Trillion dollar Biden infrastructure bill being passed, the flow through of capital to Autodesk will likely be a catalyst for earnings beats and raises. One of the civil engineers we discussed with, Garrett, works for the government and believes that Biden’s bill will be huge for Autodesk.
Below is a Q&A done with two civil engineers:
Garrett (gov. Civil engineer)
Q: How much do you spend on Autodesk compared to five years ago?
A: Five years ago we probably spent about half as much as we do today on Autodesk products. The industry has changed a lot over time. A lot less paper involved and Autodesk has been the reason why.
Q: How much do you think you guys will spend on Autodesk in the next five years?
A: Probably double. We are still on servers, we haven’t gone to the cloud. Garret is a design and build engineer. When his government employer switches to the cloud subscription model, he will need BIM 360 ~ priced at $2,600/engineer.
We also had a conversation with a private sector civil engineer, Jordan, who works for Mott Macdonald.
Jordan (Mott Macdonald)
Q: Do you use Autodesk on a daily basis?
A: Yes, I am using it right now. This is where I get all my projects done for my job.
Q: How did you first get to know the company?
A: I learned it in school first and used it for a few modeling projects I had, but mastered it during my first internship.
Q: What do you think about the company?
A: I know it’s one of those companies that everyone says to buy. (His everyone is the civil engineer universe — Peter Lynch checks this one off)
Q: Who are their most formidable competitors?
A: Autodesk has the industry completely locked down. I also use Bentley Systems a lot for my projects as well.
Q: How much do you think Mott Macdonald will pay Autodesk a year?
A: *Scoffs* Let me look. Well, it’s $1,600 a year per engineer just for AutoCAD (one of the many services and $2,600 a year for AutoCAD and BIM360 (Cloud enabled construction management). We have around 16,000 civil engineers, we pay a lot. Jordan said that Mott Macdonald still works off of servers and has not transitioned to the cloud subscription model yet.
Both of these engineers believe that Autodesk is an irreplaceable component of their daily work. The Biden bill, as well as the continued transition of customers to the cloud subscription model are reasons to believe the company still has excellent growth prospects.
Moat:
Autodesk’s moat in the design and manufacturing industry is best compared to the moat that Excel has in the finance industry. Just as finance students learn how to financial model on Excel, civil engineers learn how to design and test infrastructure projects on Autodesk software.
Opinion:
- Autodesk is a fantastic company offered at a very high EPS.
The Company has a solid moat ensuring future demand. The company is also going to benefit greatly from the Biden infrastructure plans. The customers are enthusiastic about the products. However, we believe Autodesk’s late stage cloud subscription revenue restructuring may slow top-line growth below Wall Street’s consensus. All things considered, the company may be expensive, but the control they exercise over their industry justifies this high pricing.
Screenshot from DCF. Assumptions detailed above.
Financial Metrics
Data Used in Financial Metrics
Quality of Earnings Analysis
