The Bull Case for Autodesk Inc. (NASDAQ: ADSK)

With Quiver Quantitative’s recent institutional holdings data, we can see that hedge funds and asset managers have been increasing their holdings in Autodesk Inc. ADSK. Firms such as Amundi, D.E. Shaw, and Woodline Partners LP have all recently added to their ADSK positions. Most notably, D.E. Shaw increased shares held by 73.96% (as filed on 9/30), bringing their total ADSK holdings to 1,338,100 shares worth around $325.8 million dollars at current market prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Autodesk Inc.

In November, Autodesk reported earnings results for the third quarter of fiscal year 2024. During the quarter, revenue came in at around $1.4 billion dollars, implying a 10% increase YoY. With this strong Q3 FY24 revenue result, management guided FY24 revenue in the range of $5.45 - $5.465 billion dollars, implying a 9% increase YoY. Autodesk CEO and President Andrew Anagnost had this to say about the quarter, “Autodesk AI and Platform Services will enable Autodesk, our customers, and partners to build more valuable, data driven, and connected products and services in our industry clouds and on our platform.” He continued, “Our customers remain committed to transformation, and to Autodesk, evidenced by our largest-ever EBA (Enterprise Business Agreement) signed during the quarter, and record contributions from our construction and water verticals to our overall EBA performance.” Next, CFO Debbie Clifford spoke on the strong performance during the quarter and the strong business outlook going forward, “Overall market conditions and the underlying momentum of the business remained similar to the last few quarters. Our financial performance in the third quarter was strong with much of the outperformance coming from larger-than-expected expansions of existing EBAs. Given that, we are raising revenue, earnings per share, and free cash flow guidance." With this strong earnings report in mind, we believe that Autodesk is currently a compelling investment opportunity.

Autodesk is a global leader in 3D design, engineering, and entertainment software solutions. Their diverse product portfolio, catering to industries like architecture, engineering, construction, manufacturing, media, and entertainment, includes renowned applications such as AutoCAD, Revit, Fusion 360, and Maya. They generate revenue by selling these professional software products globally through a mix of direct and indirect channels. Autodesk's end users range from architects and engineers to designers and filmmakers, who utilize these tools for tasks like design visualization, project management, simulation, and animation. These comprehensive software solutions enable customers to create, model, and analyze projects, fostering innovation and optimizing design and manufacturing processes across various sectors.

Autodesk operates in a highly competitive and rapidly evolving software industry, characterized by low barriers to entry and significant technological advancements, particularly in cloud and mobile computing. They face competition from a diverse range of players including large global corporations like Adobe Systems and Dassault Systèmes, as well as smaller firms and startups. This competitive landscape is further intensified by industry consolidation and the potential for competitors to venture into new verticals. Autodesk differentiates itself through continuous investment in research and development, leading to innovative new products and enhancements of existing offerings. Their focus on developing user-friendly, reliable, and feature-rich products, particularly in cloud and mobile computing, positions them favorably against competitors, especially in serving the evolving needs of their customers in various vertical markets.

Management is solid, and their capital allocation priorities do a great job of aligning shareholder and management interests. One way management likes to return value to shareholders is via share repurchases. Autodesk offers a lot of stock-based compensation for its employees, a practice that often dilutes shareholders over time. Autodesk likes to repurchase shares to help offset the dilutive effect of share-based compensation, while also lowering the amount of shares outstanding over time, much to the delight of shareholders. As of January of 2023, 3 million shares and $5 billion dollars remained authorized for future repurchases of common stock, under the September 2016 and November 2022 repurchase programs. These authorizations don’t have fixed timeframes, and repurchases are largely based on operating cash flows, the volume of the employee stock plan, and economic / market conditions. While management likes to return excess cash to shareholders via share repurchases (which reverses the dilutive effect of share-based compensation and allows for shares outstanding to fall over time), they currently do not offer dividends on common stock, with no plans to do so in the foreseeable future.

In terms of management incentives, management is incentivized well, with a compensation structure that does a great job of aligning shareholder and management interests. Looking at NEO and CEO compensation at Autodesk, we can see that 95% of the CEO’s compensation is at risk, whereas 90% of all other NEOs’ compensation is at risk. This is because the CEO’s compensation structure is made up of a base salary that is 5% of total compensation, with NEOs’ getting a base salary that comprises 10% of their total compensation. As we can see, management is paid to perform at Autodesk. A massive majority of the compensation structure includes equity rewards in the form of PSUs (performance stock units) and RSUs (restricted stock units). Performance stock units are based on performance measures like free cash flow, revenue, TSR (total shareholder return over 1-3 year periods), and Autodesk’s stock price. These rewards help align shareholder and management interests while allowing management to earn a larger stake in the business. As management’s stake in the business increases over time (the restricted stock units in the compensation structure helps retain talent over the long-term by allowing management to earn shares in the business based on how long they’ve been at the company), their commitment to the company's success intensifies, creating a flywheel effect.

Autodesk is a very efficient business. The business currently operates at a LTM ROE of 76.8% and a LTM ROIC of 27.3%. With a WACC of 11%, the business currently operates at a ROIC to WACC ratio of around 2.5x, showcasing the business’ ability to generate returns on capital far greater than the business’ weighted average cost of capital. Businesses that operate with a high ROIC / ROIC to WACC ratio are known as compounders, businesses that are able to rapidly compound earnings and intrinsic value over the long-term, handsomely rewarding shareholders in the process. Going back to ROE, return on equity is a great way to measure a company’s ability to generate shareholder value. Increasing ROE over time may suggest that a business is reinvesting its earnings wisely, so as to increase productivity and profitability. Since FY22, Autodesk has operated at an average ROE of 71%, showcasing strong profitability and efficiency in generating earnings from its equity investments. Looking further, we can see that EBIT has had stellar sustained growth over the last decade (Largely due to expanding operating margins as of 2019 and strong top-line revenue growth). EBIT is a great way to measure the profitability of a business’ core operations. Since 2014, Autodesk has grown EBIT at a CAGR of 13.2%, with EBIT margins expanding from 1.3% of revenue in 2019 to 21.2% of revenue today. This growth in EBIT is impressive, as the business operated at a negative EBIT from 2017-2018 (EBIT is already depressed due to Autodesk’s high R&D spend, however, negative top-line revenue growth in 2016 and 2017 depressed EBIT further as R&D spend stayed flat).

Analyzing Autodesk’s income statement, we can see some stellar sustained growth in revenue, gross profit, and earnings within the last decade. Since 2014, Autodesk has grown revenue at a CAGR of 8.2% (again, this growth rate is slightly depressed due to negative revenue growth in 2016 and 2017). On the other hand, gross profit grew at a CAGR of 8.6% during that same time period. It must be noted that Autodesk is an extremely high margin business, with a LTM gross margin of 91.5% of revenue (like mentioned above, EBIT margins are so depressed due to high R&D spend, however, R&D spend pays dividends in the future and allows for top-line growth). In terms of earnings, Autodesk has grown EBITDA at a CAGR of 57.5% since 2019* (we decided to use 2019-present data to analyze EBITDA growth as EBITDA was negative from 2017-2018, and we wanted to showcase the recent growth in EBITDA). EPS grew at a CAGR of 40.4% from 2020 to today (again, we used 2020-present data to analyze EPS as EPS was negative from 2016-2019, and we wanted to showcase the recent growth in EPS). This growth in EPS can largely be attributed to share repurchases. Autodesk has decreased shares outstanding by 5.8% since 2014.

Looking at Autodesk’s balance sheet, we can see that the business operates in solid financial health. Autodesk currently has around $1.95 billion dollars worth of cash and equivalents on the balance sheet, paired with $2.28 billion dollars worth of long-term debt on the balance sheet. As we can see, the business operates at a solid cash to long-term debt ratio, with the business operating at a net debt of $475 million dollars. Autodesk has plenty of runway to cover its debt obligations with a large pile of cash on the balance sheet. The business can use this cash to pay down debt, reinvest back into the business at high rates of return, repurchase shares, and/or offer/increase a dividend.

Analyzing Autodesk’s cash flow statement, we can see some stellar sustained growth in net income and free cash flow within the last decade, showcasing the business’ operational improvements and efficiency over time. Since 2020*, Autodesk has grown net income at a CAGR of 40% (again, we decided to use 2020-present net income data as Autodesk operated at a negative net income from 2016-2019, which was largely due to R&D spending and stagnant / negative top-line revenue growth from 2017 to 2018). Additionally, free cash flow has grown at a CAGR of 45.6% since 2019, with strong free cash flow margin expansion during that time frame (12.1% of revenue in 2019 to 40.6% of revenue today). As we can see, Autodesk is a cash cow, converting nearly 40% of its revenue into cash flow that can be used to reinvest back into the business for growth, paydown debt, repurchase shares, or offer/increase a dividend. While free cash flow generation has been shaky in the past, it seems to have stabilized in the last 3-4 years, with a massive expansion in free cash flow margins to show for it. With a low net debt and a multi-year runway for increased free cash flow generation (strong top-line revenue growth and expanding free cash flow margins), Autodesk is in a great position to continue to compound earnings and intrinsic value over the long-term. It can use this increased cash flow generation to pay off its debt, reinvest back into the business at high rates of return, repurchase shares, and/or offer/increase a dividend.

After conducting a reverse discounted cash flow analysis, we can see that Autodesk is trading at share prices that imply a 16.7% growth rate (CAGR) in free cash flow over the next 10 years, using a perpetuity growth rate of 3% (largely in line with US GDP growth) and a discount rate of 11% (Autodesk’s WACC). We believe that Autodesk is a high quality business, selling mission critical products with sticky demand. However, despite the fact that we think Autodesk is a high quality business, we believe that this valuation may be a little lofty. Yes, over the past 3-4 years Autodesk has massively grown free cash flow at a CAGR of 45.6% since 2019. While we believe that free cash flow generation will stabilize and expand over time (free cash flow was very volatile from 2016-2018 with large changes in operating cash flow), we don’t expect it to grow at such a high rate over that extended period of time. A fairer growth rate, we believe, is 10%, which implies a share price of $159/share (-35% downside from current share prices). This valuation is based completely on our proprietary models, and we encourage all investors to do their own due diligence when it comes to valuation, as it may lead to a completely different viewpoint on the business.

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This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.