Autodesk, Inc. — Overvalued Stock With Significant Downside Risk
Key Points
- Autodesk, Inc. (ADSK) operates in an industry that is projected to grow at 6% per year. The revenues are expected to grow faster than the overall industry.
- Autodesk, Inc. has experienced a considerable increase in it’s stock price over since 2018, which makes it overvalued.
- The downside risk for this stock is between 45% and 73%, based on the current management operating plan through 2026.
- A long investment into ADSK is not recommended.
Investment Thesis
Autodesk, Inc. (ADSK) has experienced considerable revenue growth over the past few years by transitioning its business model. The stock price has followed suit, outpacing the valuation of the company. Factoring in current management guidance, ADSK has a 45% to 73% downside risk. It is not a suitable investment for long-only investors.
Background
According to investor relations, Autodesk, Inc is an industry-leading design software company that operates in construction, engineering, and architecture, which are projected to grow at around 6% annually from 2023 to 2026. It has a 97% recurring revenue rate and 5.3 million total subscriptions, with enterprise sales being a key component of the revenue. It seeks to expand its verticals across planning, design, building and commissioning. With over 15 million non-license compliant users, Autodesk seeks to boost its revenues both through existing and new customers. Autodesk reinvested in its business between 2016 — mid-2019 and transitioned its business model, which led to considerable revenue growth, as shown below.
The stock price followed revenue growth, going from around $125/share in 2018 to over $331/share in March 2022.
Company Fundamentals
Based on the company balance sheet, the available cash for the company fluctuated between $1.08 billion in 2018, $886 million in 2019, and $1.53 billion in 2022. During the same period, the value of the total assets more than doubled, going from $4.1 billion to $8.7 billion. The value of the total investor equity turned positive in 2021 to $966 million and stayed relatively constant in 2022 to $849 million. The long-term debts also increased from $1.6 billion to $2.9 billion.
Analyzing the company income statements, we note that the overall revenue increased from $2.1 billion in January 2018 to $4.4 billion in January 2022. During the same period, the company’s EBITDA went from negative $395 million in 2018 to $773 million in 2022. The net profit after tax fluctuated considerably between $224 million in 2020 to $1.23 billion in 2021, then dropped back down to $497 million in 2022, after turning positive in 2020.
Company Valuation
According to company management, Autodesk, Inc will have double-digit revenue growth from 2023 to 2026. We assume the revenue growth of 10% to be conservative. The management also anticipates a non-GAAP operating margin to grow from around 31% in 2022 to 38–40% by 2026. Based on the discounted cash flow valuation, this translates to a fair price of $49.88 per share, as indicated below.
Checking the valuation relative to other companies within the same sector, we see that even while trading on the same forward PE multiple of around 80x, the sector profits after tax are projected to contract considerably, which leads to a fair price valuation around $101.89 based on the use of a trailing PE multiple. Using this approach, we still get around a 45% downside risk, which is still considerable.
Conclusion
The stock price of ADSK has outpaced its valuation. Based on this analysis, the downside risk associated with this stock does not justify an investment.
