Stock Analysis & Ideas

Autodesk Stock: Reasonably Priced Innovation and Metaverse Potential

Shares of CAD software developer AutoDesk (ADSK) have been sinking lower in recent sessions. Now down over 43% from its 2021 peak of around $344 per share, dip buyers have a tough decision to make as the stock looks to surrender more than just its pandemic-era gains. While AutoDesk is still a cutting-edge innovator worth a premium, its lofty multiple will likely continue acting as a major drag on the stock with interest rates poised to surge higher.

With the leading design tools, AutoDesk has high barriers to entry, protecting its slice of economic profits in the architecture, engineering (AEC), and construction industries. The company continues one-upping its own offerings with continued updates.

As a trusted name in the AEC space for many years, AutoDesk rivals have been mostly kept at bay. Undoubtedly, the AEC arena may hold tremendous growth over the long run, but it’s incredibly cyclical, and it’s this degree of cyclicality that software firms may wish to avoid. In any case, competing against a behemoth like AutoDesk is never a good idea.

Undoubtedly, AutoDesk’s wide moat is a major contributing factor behind the lofty price-to-earnings multiple. Even after getting cut nearly in half, shares of ADSK are still not cheap at 87.1 times trailing earnings and ~10 times sales. While AEC remains the biggest chunk of AutoDesk’s total revenues, it’s the next frontier, the metaverse, that could be key to next-level growth.

With investors cooling on high-multiple tech stocks, AutoDesk seems incredibly intriguing after its latest slip, given its more promising long-term growth story. I am mildly bullish on the stock. While the stock appears oversold versus its growth prospects, rising recessions risks could drag ADSK stock lower over the medium term.

AutoDesk’s Recent Acquisition Could Make It a Compelling Metaverse Play

With AutoDesk’s dominant footing in the 3D modeling space, its talents would translate over to the “metaverse” really well.

The company recently acquired extended reality (XR) software developer The Wild in a deal that mostly went under the radar of most investors.

Indeed, Meta Platforms (FB) single-handedly turned the metaverse trend into an overnight sensation with its intriguing that also unveiled a questionable name change. Meta is hard at work on virtual reality (VR) and augmented reality (AR) hardware and software, but what exactly is Extended Reality (XR) about, and where could AutoDesk be looking to make a dent in the digital worlds of the future?

XR lies in the gray area between AR, VR, and mixed reality (MR). The Wild is a platform that leverages XR to allow those working in the AEC sector to work together in a metaverse-like world. Think of it as a workplace environment catered to AEC professionals. Blueprints, real-time 3D renders, AEC-specific project management tools, and everything else that will be commonplace in digital workplaces appear to be The Wild’s specialty.

Indeed, the acquisition seems like a perfect fit for AutoDesk, as it looks to the digital frontiers that Meta and other software companies are right now. The real question is if AutoDesk’s offering can rival the digital workplace environments produced by the likes of Meta. Given AutoDesk’s AEC talent, I think it could be the go-to choice for architects, construction workers, and civil engineers.

Looking ahead, AutoDesk is unlikely to stop at just the AEC scene as it looks to unlock new growth. As it innovates in the AEC space, it also has the means to disrupt the broader 3D modeling space. Media and entertainment is a booming field that could allow AutoDesk to diversify away from its cyclical AEC exposure. Products like Maya and 3DS Max could face considerable tailwinds once the metaverse does go mainstream.

In any case, it’s excellent news that AutoDesk is already placing bets in virtual and augmented reality as it looks to stay on the cutting edge of innovative trends.

Could AutoDesk’s AEC Exposure Work Against It, Come Recessionary Times?

AutoDesk is a dominant player in AEC, but with recession worries picking up, the cyclical AEC industry may act as a significant drag on ADSK stock. The cyclicality of construction and engineering projects is perceived as a negative as we move from a late-cycle market environment to the end.

Still, AutoDesk stock has already been punished so severely. Even if a recession happens, it will take a severe one to keep an innovator like AutoDesk down for an extended duration.

In any case, the severe impact of a recession on AutoDesk’s revenues is something to be mindful of.

Wall Street’s Take

Turning to Wall Street, ADSK stock comes in as a Strong Buy. Out of 16 analyst ratings, there are 13 Buys, two Holds, and one Sell recommendation.

The average AutoDesk price target is $279.20, implying upside potential of 43.1%. Analyst price targets range from a low of $220.00 per share to a high of $300.00 per share.

The Bottom Line on AutoDesk Stock

AutoDesk is a very talented innovator, but brighter days may be overshadowed by an economic downturn. With a wide moat in the AEC space and enough talent to thrive in the metaverse, AutoDesk remains a disruptor at heart. Unfortunately, this wouldn’t save ADSK stock if a recession were to take a stride out of the step of AEC projects worldwide.

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