Maintaining an API architecture for its software has facilitated third-party development and won fans
Nasdaq-listed Autodesk is a global software and multimedia company that caters to designers in the architecture, engineering, construction, manufacturing, media, education and entertainment industries. The company’s product offerings are focused on four primary product families, which are architecture, engineering and construction (AEC), AutoCAD and AutoCAD LT, manufacturing, and media and entertainment (M&E). Autodesk, through its subscription plans, represents a hybrid of desktop software and cloud functionality, which provides a device-independent collaborative design workflow for designers and their stakeholders. Autodesk is trading at US$255.26 ($343) per share, giving it a market cap of around US$55 billion.
Apart from having good financials and prospects, we believe Autodesk is undervalued mainly because of its position in the Nasdaq index. The market risk, which is characterised by the benchmark’s performance, can be rewarding if the benchmark significantly outperforms. Good examples are the US benchmark indices, in particular the Nasdaq, which returned more than 70% over the four-year holding period in our portfolio. We believe that buying any stock in the Nasdaq that performs in line with expectations at the least, has a high chance of outperforming the benchmark itself as it would enjoy gains from both the general market movement and company-specific expectation beats.
While not every Nasdaq stock will outperform the index, we think Autodesk is one stock that is likely to outperform the index, given its daily stock beta against the Nasdaq over the past three years has been 1.14. A value of more than 1 implies that the stock is more volatile than the index. Simply put, a decent stock in a great benchmark or index will likely bring investors great returns and is relatively undervalued compared to other stocks in the benchmark that are likely to underperform.
There are many reasons why we think Autodesk is a good investment. The first is its shift to recurring subscription revenues which provide better revenue visibility, as shown in Chart 1. This also provides more durable and consistent revenue growth, as seen in how the company’s revenues were much less volatile during the pandemic as opposed to the period during the Global Financial Crisis. Another supporting factor is the company’s key strategy of maintaining an architecture based on an application programming interface (API) for its software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables its customers and third parties to customise solutions for a wide variety of highly specific uses, which aid greatly in its ability to capture the addressable market share.
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Also, Autodesk’s revenue diversification spans geographical sectors, product families and customers, which reduces the concentration risk of being reliant on a single factor for revenue and earnings generation. The company’s shift towards the cloud is also strategic, given the rapidly expanding market for cloud-based products and services. Furthermore, Autodesk’s investments in the construction market that is going digital through the acquisition of construction management software could also be a profitable move as there are ample reasons supporting the digitisation of the currently inefficient construction market. The company’s operating model targets a 10%–15% revenue growth, along with a 30%–35% free cash flow margin, which is to be executed through strategies involving the monetisation of non-paying users, enterprise-level product and service expansion, and a growing subscription revenue base.
Autodesk’s financials have been relatively good, especially its cash flows. Chart 2 shows the company’s operating and free cash flows over the past five years. The company’s strong margins reflect its position as a leader in the design software space as illustrated in Chart 3, which shows the positive growth in the company’s operating margins over the past five years. Autodesk also trades cheaply, with 8% and 9% discounts for its forward P/E and forward EV/Ebit respectively compared to global peers, which indicates it is an attractive pickup.
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The company has 15 “buy” calls, 11 “hold” calls and no “sell” calls, with an average target price of less than 5% above its current trading price. Based on our in-house valuations, we believe that the intrinsic value of the company is at least over 20% above its current trading price for the next 12 months. Autodesk, through its strong margins and position as a leader in the design software niche, is suitable for investors seeking market risk through long-term growth companies.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
