ADSK - Autodesk: Opportunities For Growth

2023-10-18 07:13:23 ET

Summary

• Autodesk’s broad technology moat with CAD software leaves it well-poised for growth in market share.
• The company has upcoming AI opportunities that are set to further drive innovation and growth.
• Even though valuation remains relatively high, ADSK's market dominance and future potential justify the premium price.

Overview

Autodesk Inc. (ADSK), based in San Francisco, California, is a multinational software corporation specializing in software for 3D design and CAD (Computer-aided design) in various industries including architecture, engineering, manufacturing, and entertainment. Some of its most popular offerings include Autodesk Architecture, Engineering & Construction Collection ((AEC)), Autocad, Autocad LT, and BIM 360 Design. Despite Autodesk's relatively expensive valuation, the company's wide technological moat paired with new opportunities in AI products make it well-poised for future growth.

Dominant Market Share

Autodesk has the dominant hold on the market share of CAD products. The company's AutoCAD has been reported to have the biggest install base controlling 39.12% of the market. These products have grown the company's market share by 27.22% over 3 years. The dominance of the company provides Autodesk with industry security as it creates reliance on the product, increasing the necessity of the products and the longevity of the company.

The market size of 3D rendering software has been exponentially growing in the past couple of years. As the industry grows, there will be a growing reliance on 3D design and CAD products. With Autodesk's wide range of products and services, the company will be able to further provide products to assist businesses in various industries.

Strong Earnings Growth & Financials

Autodesk has seen steady earnings growth over time with operating cash flows increased by 24.1% YoY. This strong growth was driven by strength in existing products, such as AutoCAD and AutoCAD LT, growing 9%, AEC package revenue growing 14%, and the Media & Entertainment Collection revenue growing 10%. Autodesk has also seen extra revenue growth this quarter with the renewal of many three-year payment plans that started at the beginning of the Coronavirus lockdown.

Autodesk has introduced a new transaction model for Flex. This allows new customers to try new products with friction, allowing the company to better serve infrequent users. The new model has brought many new customers into the ecosystem, signing 3 million dollar deals in the past quarter. The company hopes that this will provide a more direct relationship with its customers and help integrate with its partners further. The company is preparing to open this translation model more broadly with plans to introduce the model in Australia later this year.

Additionally, in this quarter Autodesk has added Autodesk Construction Cloud to the Autodesk Architecture, Engineering & Construction Collection. The addition has made the program more successful and improved the workflow between its products. The addition has also pushed smaller companies to standardize on Autodesk Construction Cloud, creating more longevity for Autodesk's products.

We believe that this combination of existing product growth paired with new opportunities will continue to drive Autodesk's steady growth moving forward. This steady growth will assist the company in gaining further market share, which will cement it as a staple within the industry.

AI Potential

Autodesk has been using AI in many different ways across many of its products. The main AI processes used by the company are Design Automation, Computational Modeling, Generative Design, and Machine learning. When using Design Automation, the user can automate tasks by setting parameters and creating scripts. When using Computational Modeling, the user describes a process to create a desired outcome. This usage of AI is similar to Design Automation but can also evaluate the outcomes of the design. With Generative Design, the user can generate and evaluate multiple design alternatives based on the original input from the user. With Machine Learning the user states desired outcomes and the AI returns results based on past data.

Ultimately, with further development of AI in Autodesk's ecosystem, the company will be able to provide better workflow and a better experience to its customers. The increased workflow and user experience will keep recurring customers as well as draw new ones in, creating a sustainable business model for the company.

Valuation

We used Peter Lynch's Fair Value Models to determine Autodesk's valuation. For this model, we assume a forward EPS of $7.46 and a FWD EPS growth rate of 30.62%. Additionally, we assume that EBITDA will grow at an average of 16.81% per year, as it has for the past 5 years. We believe that Autodesk will be able to maintain these high growth metrics because of its powerful technology moat, dominance in market share, and development of new AI technologies. After plugging in these assumptions, Peter Lynch's Fair Value model values Autodesk at $212.64, which is approximately in line with its current market price. Even though the company is highly priced, we believe that this expensive valuation is justified due to its strength in existing products paired with new growth opportunities.

Growth Risk

While Autodesk doesn't face much competitive risk thanks to its technological moat, its valuation is currently sitting at a premium due to the expectation of rapid future growth.

When looking at consensus EPS estimates on Seeking Alpha, it's clear that while growth targets are fairly high at 12-16% yearly expected EPS growth for the next 3 years. The same goes for revenue, which is expected to grow 8-12% over the next 3 years.

Although our valuation model points to a fair valuation at current growth estimates, if revenue and EPS estimates fell, Autodesk's fair value would decrease significantly. We believe that investors should take Autodesk's growth risk into consideration, as high growth is likely already baked into the company's stock price.

Conclusion

We believe that Autodesk will continue to dominate the CAD industry due to its broad technology moat and its usage of AI technology to increase workflow and improve customer experience. Even though the company's valuation is fairly expensive, these tailwinds will maintain the company's consistently high earnings growth, justifying the premium valuation. For these reasons, we believe that Autodesk is a buy.

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