ADSK - Autodesk: Short-Term Pain Overweigh Long-Term Bullish Outlook

2023-03-30 04:25:55 ET

Summary

• I believe short-term downsides are getting apparent with reinvestments impeding margin expansion and potential downside risk to the top line in F24.
• FY24 growth will largely stem from targeting core subscribers.
• I believe there is potential to use the connected data on its platform to train bigger ML models to implement productivity tools.

Thesis update

My thesis so far was that Autodesk ( ADSK ) is a great business, large TAM, and is an interesting investment opportunity, but the short-term risk are unavoidable. Following the recent Investor Day, my conviction has increased that there will be some short-term difficulties ahead. This is because I anticipate that reinvestments will hinder margin growth over the next two years, and there may be a potential risk to the company's top-line in F24 due to exposure to cyclical end-markets. The market seems to agree with me, as the stock price dropped by more than 4% on 22nd March following the company's Investor Day. However, I believe the presentation contributed to the development of the business and stock's longer-term narrative. In addition to discussing the company's three industry clouds and how they will connect data, teams, and workflows, management also reaffirmed their F24 guidance and discussed key long-term growth opportunities/drivers. I find it noteworthy that ADSK has reiterated its 4Q23 midterm outlook of 10-15% revenue growth and 30-35% FCF margins (more below). In my opinion, ADSK will eventually be successful in moving its customers to its industry clouds, which will provide access to linked data. This data can then be utilized to develop new AI/ML tools that will help enhance the efficiency of its design/make users.

Overall, I feel like there is more clarity on ADSK's core growth levers and financial framework after the presentation, but I'm still recommending a hold rating due to the upcoming short-term pain. Below, I discussed more on the long-term outlook of the company to set up the bull case once we get past the tough near-term.

Growth outlook

The presentation illuminated the critical factors that will allow ADSK to realize its growth objectives in F24 and beyond. ADSK's growth goal of 10-15 percent relies on three interrelated factors. 7-10ppts of the growth will come from the core subscription business, and it will take the form of a balanced volume and pricing structure. 1-4ppts will come from expanding into related markets, while the rest will come from better targeting consumers and expanding existing channels. I expect that ADSK will focus on engaging with its larger enterprise customers to maintain high retention rates and increase renewal ACV, as a large part of the growth equation is based on renewals and expansions.

My perspective is that I think that ADSK Construction Cloud will continue to be an important growth driver for the company as factors like a lack of qualified construction workers, unpredictability in the supply chain, and a general reluctance to adopt new technologies in the industry all contribute to an optimistic outlook for expansion. NRR in the 115-120% range and over a thousand brand new logos in 3/4FQ23 are indicative of this. On the manufacturing side, I believe ADSK will continue to reap the benefits of Fusion 360's popularity in the mid-market as a result of the product's reasonable cost, cloud-native design, adaptability, and smart automation features. Also noteworthy is the early traction ADSK had with Flex a year after its launch, when 20% of customers bought more tokens than they had initially committed to. For customers who only need the product occasionally, I think Flex will continue to be a good option, and it will give ADSK another revenue stream.

Connected Data

Fusion, Forma, and Flow, the company's three industry clouds, were highlighted as the means by which management intends to continue connecting data, teams, and workflows. While ADSK is still in the early stages of migrating its customer base to the industry clouds, it shows promise in addressing the persistent problem of disjointed workflows and data silos. This, in my opinion, will enable ADSK customers to transition away from offline data transfers and toward cloud-based access to granular data, thereby facilitating the linking of processes and the streamlining of workflows in order to speed up collaboration and reduce friction. Additionally, I believe that ADSK's focus on cloud computing and connected data creates an opportunity to enhance user productivity by using AI/ML to generate creative solutions and eliminate tasks that do not add value. Several intelligent automation use cases, such as automated modeling and automated machining, have already been introduced by ADSK via its Fusion cloud. Management has also alluded to openings for the application of AI/ML via the company's Flow industry cloud in the development of new content creation instruments for the purpose of automating mundane tasks and generating production insights via interconnected data. Thus, in my view, ADSK has the ability to utilize the connected data available on its platform to train larger machine learning models for the purpose of developing productivity tools such as a copilot. Such tools have the potential to substantially enhance the productivity of its user base, as well as provide ADSK with another alternative to price its product.

Conclusion

When it comes to cloud-based design and engineering software, I still consider ADSK to be a frontrunner with a commanding market share; the company's offerings are frequently held up as the industry standard in verticals such as AEC, manufacturing, and more. Long-term operating margins for the company could be in excess of 40% due to its advantageous market position and relative stickiness. However, the inherent cyclicality of its end-markets, such as manufacturing and commercial construction, causes me recommend a hold rating.

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