ADSK - Autodesk: Still Bullish On Subscription Model

Summary

• One year ago, I wrote an article on Autodesk predicting the next 3 years.
• So far the stock has underperformed the market, but this is not surprising as tech stocks took a large hit in 2022.
• I look to see how ADSK has performed vs. its peers and if my prediction thesis is still intact.

One year ago I wrote an article on Autodesk ( ADSK ) predicting the next 3 years. After the first year it has underperformed the market, however this was expected as tech stocks took a large hit in 2022. The important part of this review will be to see if my thesis is still intact.

About Autodesk

A more detailed look at ADSK can be found in my previous article, but I will quickly review the company again. Autodesk is a software company that provides computer aided design, or CAD, software that is widely used across a slew of different industries. The most heavily saturated market for their applications is engineering, and is nearly irreplaceable in several specific markets. With a growing need for CAD and software solutions in the modern world combined with a recently transformed business model to SaaS, Autodesk is poised for success in the future. Don't just take my word for it, Seeking Alpha also assigns high marks for their growth.

A Look Back at 2022

From January of 2022 to January of 2023, Autodesk experienced substantial growth with 15.72% YoY growth in revenue along with 25.18% growth in earnings per share. Not bad for a company that has been around for 40 years, especially when you consider that these metrics are actually accelerating. At a quick glance, that would probably register as a safe bet that the stock performed well over the year, but unfortunately several factors led to an opposite result. Tech valuations were sky high back in January of 2022 and had an unavoidable day of reckoning coming in the future, in addition to the fact future analyst estimates were extremely optimistic. That day came quickly and has yet to recover, leading to underperformance of the market but with that comes more realistic multiples.

Adobe Comparison Update

The central thesis to my 3-year prediction was pegged to the historical performance of Adobe ( ADBE ) who is about 3 years ahead of Autodesk on the transformation to an SaaS model. Comparing to this benchmark, there should have been strong growth in revenue throughout the year, accompanied by even stronger growth in operating margin. By looking at a chart comparison, it appears ADSK matched ADBE's historical performance and appears to still be perfectly in line with the 3-year prediction. If the company is able to keep this up, there will be a continued meaningful expansion in margins for the next several years, an appealing prediction for a company that has recently experienced multiple compression and has greater potential for future outperformance.

All tech stocks experienced multiple compression in 2022, but the only item I am concerned with are multiples relative to peers. As previously investigated, ADSK was trading on the middle-to-lower end of the price-to-sales ratio comparison with its peers. Let's look at what the landscape looks like now.

As we can see, even though multiples have compressed, Autodesk is doing just fine amongst its peers. I believe it is valued fairly and has the potential for outperformance in the future, with a valuation that is now more realistic and easier to digest.

The Next Two Years

While I am less than thrilled with year 1 of my 3-year outlook, I am still firmly bullish on the outlook for this great company and believe the current landscape presents an opportunity to initiate or add to a position in ADSK. The numerous catalysts in the future and impressive metrics for profitability and growth make for a high quality stock for those looking to add to their portfolios. However, there are always risks we must keep in mind.

As correctly predicted in my inaugural article in January of 2022, the stock experienced a greater than market average drop as the US economy slowed towards a recession throughout the year. While the future risk for further drops has been minimized, it is still a risk nonetheless if the market and economy continue to decline. Additionally, the risk of market share erosion could become a reality if the company is not able to continuously innovate and expand into the future. Several of the main revenue driving applications do not currently face much threatening competition, but even a small change in that status could result in noticeable impacts on future revenue growth. In my opinion, the risk of this is extremely low in the next two years.

Conclusion

Upon reviewing year one, I still strongly stand with my original bullish outlook. Risks facing the company in the future are not of high concern in my view, I believe their software operates as more of a necessity in several industries and demand will not be as effected as that of other companies who operate in other sectors. Even if revenue growth slows down, the benefits of the transition to a subscription based model will generate meaningful improvements to profit margins.

While I currently do not hold a position in this stock, I am now highly interested in starting a position in the coming months. For those interested in holding long term positions in companies with negligible debt, high profitability, and strong growth, this may pique your interest as well.

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