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Autodesk Reaches to the Clouds for Growth
Stock Analysis & Ideas

Autodesk Reaches to the Clouds for Growth

Autodesk (ADSK) stock has lagged the broader markets, down 4.7% year-to-date on the back of an underwhelming second quarter that surpassed expectations of the Street, but not investors.

Indeed, earnings beats, even handsome ones, are no longer enough to move the needle higher on a stock with a trailing price-to-earnings multiple north of 46.7x.

As the company reaches further into the cloud, though, investors might be paying too much attention to today’s modest margins, when they should be focusing more on the long-term margin expansion opportunity at hand.

The renowned engineering and architecture design software developer behind popular products like AutoCAD has seen more than its fair share of stumbles due to COVID-19. The fundamentals are intact though, and the recent bout of underperformance has allowed the stock a chance to grow into its hefty multiple.

Despite a lofty price tag, I am bullish on the stock and its ability to recover over the next two years. Why?

Near-term COVID-plagued results seem to be clouding the longer-term growth story, which is still very much in full play. Autodesk is reaching for the clouds, and the potential positive long-term implication to the stock should not go discounted. (See Insiders’ Hot Stocks on TipRanks)

Autodesk Reaches for the Clouds

Given the company’s multi-year plan to merge its software suite with the cloud, Autodesk may very well be in for a considerable and sustained margin boost. Moreover, such a transition would likely make it easier for clients to try new offerings, given the ease and convenience of subscribing to cloud-based services.

Undoubtedly, the integration strategy could pay meaningful dividends, and it seems to rhyme with the aggressive cloud push made by Adobe (ADBE) a few years ago.

Could Autodesk do for architects and engineers what Adobe did for creatives? It’s possible, but there will be bumps along the way.

It’s also worth noting that Autodesk caters to creatives as well. Specifically, with its flagship multi-use graphics software Maya.

It’s hard not to love Maya, as it continues adding to Autodesk’s already lofty $1.9 billion cash position, which leaves the door open to acquisitions.

Giving Customers What They Want

Alongside the aggressive cloud push, Autodesk’s newly launched pay-as-you-go token-flex licensing model could be a meaningful sales driver over the long run. Pay-as-you-go is what customers want in the cloud age, not the outdated licensing model popular in past decades.

Autodesk’s Flex offering, which launched last month, may not just make clients happier. It could also be a major driver of revenues for many years to come. Firms that use more will pay more, and those paying less will be given a break. Pretty standard with pay-as-you-go.

Indeed, cost savings from smaller-scale users will be redirected towards their growth. Over time, such small-scale users may be given the means to boost their growth such that their usage appetite will increase over time.

Given greater financial flexibility, such firms will also be more willing to test the waters with new products or features. This increased willingness could spark greater early adoption of new innovations.

Over the long run, Flex is a model that just makes sense for Autodesk, and its clients.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, ADSK stock comes in as a Strong Buy. Out of 12 analyst ratings, there are 10 Buy recommendations, and two Hold recommendations.

The average Autodesk price target is $352.70. Analyst price targets range from a low of $295 per share, to a high of $400 per share.

Bottom Line

For the second quarter, Autodesk grew revenues by 16% year-over-year, thanks in part to robust subscription growth of 21%. Despite yet another EPS beat, the stock not only failed to move higher, it sunk.

Are investors losing sight of the long-term growth story over near-term pressures, and fears of higher rates?

Perhaps. In any case, Autodesk’s comprehensive suite has a moat that could widen, as the company sets its sights on improving the user experience, while laying out a foundation for substantial average revenue per user (ARPU).

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

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