2023-04-17 03:57:21 ET
Summary
- Autodesk's steep learning curve discourages users from switching to competitors, which creates a virtuous cycle of demand for its products.
- Growth catalysts, such as cracking down on non-compliant users and acquisitions, along with billions in free cash flow, will allow Autodesk to continue succeeding.
- Autodesk appears to be attractively priced relative to historical valuations.
Autodesk, Inc. ( ADSK ) is an industry leader with a competitive advantage that discourages customers from jumping ship for its competitors. Furthermore, the stock is currently undervalued relative to its historical levels. As a result, we are bullish on ADSK.
Autodesk's Competitive Advantage Creates a Virtuous Cycle
Autodesk has an interesting competitive advantage -- its products are difficult to learn. Normally, businesses strive to create products that users can easily use and understand. However, given the use cases of the intended users, the software needs to be highly advanced and, thus, difficult to use.
This steep learning curve discourages users from jumping from platform to platform just to find a better price, especially since competitors' software is just as complicated. Therefore, once people become accustomed to performing tasks efficiently on AutoCAD, they're not going to want to switch to a competitor.
At a company level, the costs of switching could be staggering, especially for those who employ thousands that are working on large projects with urgent deadlines. If the workforce is already trained in something like AutoCAD, then there's no shot that a switch will happen.
Recognizing this advantage, Autodesk targets schools and students with free packages in order to hook those interested in areas such as engineering early. Since the company's products are widely used, it makes sense for students and schools to learn and teach how to use them. In addition, with students continuing to graduate from schools with these skills, it makes sense for employers to continue demanding these skills. This creates a virtuous cycle for the company and continues to drive demand for its products.
Growth Catalysts
A way for Autodesk to increase its revenue is by simply targeting some of its existing users. Specifically, those who are considered "non-compliant" who are pirating their software. There are currently millions that fall into this category, which means millions who have already dedicated a significant amount of time to learning the software. As a result, they are unlikely to ditch Autodesk's platform and start using that of a competitor, especially since other comparable alternatives are not free either.
This could be an important source of growth during periods of economic slowdown. Sure, there will be those who might struggle to switch over to a paid version, but there will still be plenty who will be able to become compliant and help soften the impact of a slowdown.
Another growth catalyst is acquisitions, which Autodesk has been active in doing. Indeed, it has acquired 49 companies throughout its history, with its latest three being The Wild, Prodsmart, and Moxion, all in 2022. This is made possible by the billions in free cash flow that it generates.
Additionally, this also allows Autodesk to reinvest in research and development, resulting in new products. The firm plans to use these new features to persuade the remaining legacy users to make the switch over to its subscription service. Additionally, as new features are added, it can justify raising its prices with very little resistance from customers due to the high switching costs.
Valuation
A company like Autodesk is usually best valued using a discounted cash flow model. However, given that free cash flows will be impacted in Fiscal Year 2024 due to short-term headwinds like shifting to annual billings instead of multi-year billings, it makes forecasting beyond 2024 difficult.
As a result, we will look at the valuation percentage, which shows how far above or below the current price of a stock's historical valuation is. It takes into account a long-term average of the price/sales ratio and price/earnings ratio and mathematically determines whether the current price is high or low relative to those historic valuation multiples.
A negative value indicates the current price is above the historical valuation, while a positive value indicates it is currently trading at a discount to the historical valuation.
It is important to note that this is not a measurement of how the stock's price relates to its "intrinsic value" but is instead a measurement of how the market is valuing the stock relative to how it was valued historically.
A look at the image above shows that Autodesk is currently near the most undervalued levels since going public. Thus, on a relative basis, Autodesk is currently undervalued.
Risks
As with any company, Autodesk comes with its fair share of risks. Its biggest risk likely comes in the form of technological advancements from competitors. The way ChatGPT and Microsoft's Bing ( MSFT ) are now seriously challenging Google's ( GOOGL ) search engine dominance, artificial intelligence may one day challenge Autodesk. Therefore, investors need to be aware of technological updates and monitor whether or not Autodesk is keeping up with competitors.
Indeed, a look at its disclosures highlights that Tech & Innovation is tied with Finance & Corporate as categories with the highest risk at 28%. In addition, the image below also shows that Autodesk's Tech & Innovation risks are higher than the sector average.
Final Thoughts
Overall, Autodesk currently remains the industry standard among professionals like engineers with software platforms such as AutoCAD. With steep learning curves and high switching costs, Autodesk is unlikely to see long-time users leave for its competitors. Although an economic slowdown remains a possibility, the firm's subscription model and necessary products should help it weather any potential storm. In addition, since the stock is the most undervalued it's ever been relative to history, it may be a good time to open a position.
For further details see:
Autodesk's Secret Weapon: Unlocking The Power Of A Virtuous Cycle