Autodesk (ADSK) Analysis – Monthly Patron Pick
If your an engineer or architect or have any friends and family in those spaces you probably have heard or AutoCAD (most popular product from Autodesk). It’s 3D modeling software used across industries like construction, engineering, and architecture.
I’ve actually seen it used first hand when I worked in the food manufacturing business. We had projects worth upwards of $30 million dollars where AutoCAD was used for design work . This 3D modeling allows engineers to visualize how new equipment or construction may fit into a space to see what is theoretically possible.
You don’t want to order millions of dollars of machinery, products, or equipment and realize it won’t fit into the required space during installation!
The company also has products around product design & manufacturing along with Media & Entertainment.
The company in my eyes is very similar to Adobe. They went through a transformation years ago switching to the software as a service subscription business. It’s honestly one of my favorite business models!
It allows companies to scale and be extremely profitable. Just look below at the pricing for AutoCAD. It really doesn’t cost that much to support new customers on the cloud! All of their products have similar structure between subscription and then flex (paying by time for less frequent users).
With a market cap around $62 billion, we are looking at a large cap growth company (5yr Revenue CAGR at 14.6%, but their FCF is expected to grow at a faster pace). Similar to a lot of other growth plays the stock saw good returns in 2020, followed by some underperformance in 2021 (-12% YTD).
Growth Avenues and SaaS Transition
The growth for the company going forward seems to be a combination of going after a total addressable market of $69 Billion (by 2025) along with trying to convert more of their non-compliant users (From a presentation at the end of 2020).
Basically you have a ton of users that aren’t using the latest software or are using old licenses that are no longer fully supported. Since they are moving everything to the cloud and software based, it becomes easier to convert these non-compliant users into paying customers (by making it easier to convert free trial users) and introducing new features that entice businesses to upgrade.
You’ll see that during the SaaS transition, that the company went through a phase of decreased revenue, but once it is fully integrated and build out their monthly recurring revenue streams, then the business becomes a cashflow machine if it can retain customers.
An important metric that people look to for SaaS companies is NRR or Net Retention Rate which shows how much growth is without adding new customers. I don’t think I’ve ever written the formula in previous analysis posts. There are four components to the formula: MRR, ER, RR, and RC.
- Monthly Recurring Revenue (MRR) –This is the amount of revenue that a company can expect to receive in a given month.
- Expansion Revenue (ER) – This is the amount of revenue that is added in a time period due to upgrades and cross sells.
- Revenue Reduction (RR) – This is the amount of revenue that is subtracted due to downgrades to lower payment plans.
- Revenue Churn (RC) – This is the amount of revenue lost due to customer cancellations.
The Formula is as follows:
(MR + ER – RR – RC) / (MR) = NRR
For Autodesk, their NRR is within the range of 100 to 110 percent. Anything over 100% is good, because it means that they are increasing profits from current customers while maintaining that same customer base.
So the growth will come from accelerating digitization in their current addressable markets along with hooking customers into their system that is hard to leave once established. I mean their latest quarters have shown 97-98% of their revenue is from recurring revenue sources!
Let’s start off with saying the financials look great. It is a high margin business with gross margins above 91%. This allows plenty of room for the business to expand operating margins in the future as the subscription revenue is able to scale. You’ll see below that the consistent profitability started around 2019 and really hasn’t left. Why? Again 97% of revenue is recurring and they have a solid NRR rate!
The company is also sitting on $1.9 billion in cash and generating $1.4 billion in free cash flows over the past 12 months.
The only thing I see as a negative, is that the book value of the company is lower, but looking at the history of Autodesk it seems like the issue was total equity dipped into the negatives a handful of years back and is now on the upward trajectory.
In terms of revenue mix, the company makes a majority of their money with AEC products and by region is actually relatively split. The growth across regions look to all be inline as well. The revenue growth is around 18% in this last quarter.
In term of growth, the revenue has picked up in the last couple years, which I believe is tied to the SaaS transition and a pick up in digitization across industries sparked by the pandemic.
If we compare the company to it’s peers it trades at a higher profitability multiplier, but more in line for P/S based on expected growth.
The company put out the following in terms of guidance for Q4 and FY 22 (they have a weird fiscal schedule) 🙂
I used this information in my DCF model. Something else I wanted to point out is if you look at their tax provision for TTM it is negative (the reason being for a large one off tax benefit 4 quarters ago), but going forward I used 27%. They also told us CapEx was expected to be around $65 million for FY22.
Below are the assumptions used to come up with a average fair value of $223.
Full details in the attached excel spreadsheet.
Based on using conservative estimates it looks like the company is receiving a higher premium still due to the nature of it’s business model, but if we back into an intrinsic value using the cashflows being generated it is a bit overvalued at current prices.
The company is growing, but their revenue pace is expected to be in the lower teens over the coming years.
If we look to Tip Ranks, Wallstreet thinks it has more upside than what I have projected (maybe I’m being to conservative on my future multiples but I have a target of around $265 a year out.)
Risks & Ops
The risks I see with this company is that growth will eventually tap out a bit if their main focus is on architecture, engineering, and construction (where they are currently king). There is only so much growth to be had from non-compliant users and an uptick in older industries leaning more into digitization. Don’t get me wrong. The growth is good, but not explosive.
One opportunity would be the metaverse. This companies software is designed to model 3D buildings, products, and animation (for games and entertainment). Below is their Maya product which could be used for building out virtual worlds.
The reason I bring this up as an opportunity is because the total addressable market for the Metaverse is expected to be massive.
While I do love the business model and the software capabilities. At current multiples I think the stock is a little pricey for me (especially in the current market environment for growth stocks). Also I think the revenue growth we see over the next 5-10 years will be decent, but my worry is that the AEC space isn’t necessarily as big of a market as something like the metaverse. If there is a heavier focus on other faster growing industries, it makes it more interesting for me for a long term hold.
At the same time, this stock is one that will continue to be on the watchlist because if I can get a SaaS business that has 90% gross margins that is growing EBITDA at a +20% rate YOY closer to fair value (then I’m interested).