Autodesk A Little Undervalued, But Uncertainty Is Rising

By Stephen D. Simpson, CFA | August 23, 2013 AAA

It's interesting to see which excuses the Street willingly accepts when a company is struggling with guidance. In the case of Autodesk (Nasdaq:ADSK), the Street isn't too bothered by another round of lower guidance and ongoing economic uncertainties. Instead, investors seem excited about the potential of a more pronounced transition to a SaaS model. Although I think the Street may be a little too optimistic on that point, the shares do look a little undervalued and remain a volatile software play leveraged to improving economic activity.

Fiscal Second Quarter Basically On Target
It sounds like there's still quite a bit of noise and uncertainty in Autodesk's core CAD/CAM end markets, but the company still delivered an in-line quarter.

Revenue fell 1% from last year, and a little more than that on a sequential basis, as an 8% drop in license revenue was offset up a 9% increase in maintenance revenue. Both Architecture, Engineering, and Construction (AEC) and Manufacturing were up annually and sequentially, while Platform/Emerging declined over both periods.

Margins weren't great, but analysts weren't expecting that they would be. Gross margin (adjusted) declined more than a point, while operating income fell 5% and operating margin fell by one point.

SEE: 3 Secrets Of Successful Companies

Emerging Markets Have Yet To Emerge
There's still quite a bit of uncertainty and turbulence in Autodesk's core end-markets, but that's not exactly news. If you look at a graph of past trends across the AEC, Manufacturing, and Platform businesses, it looks something like a squid's tentacles. In any case, the recovery in non-residential construction is still far from confirmed, and it often takes one or two quarters for improvements in regional/national PMIs to show up in better licensing performance.

Nevertheless, management issued rather weak guidance for the fiscal third quarter – offering a new midpoint that was about 6% below the prior average estimate. Emerging economies remain particularly challenging for Autodesk at this time, a point made previously by PTC (Nasdaq:PMTC) particularly with respect to Chinese manufacturing. It's also worth noting that Dassault's (Nasdaq:DASTY) quarter was not exactly a blockbuster either, but it has done no real harm to the stock.

Will A SaaS Transition Really Move The Needle?
In a vacuum, I suspect that Autodesk's guidance would have been a setback for the stock. Management offset that with news that it intends to accelerate the company's transition to a more SaaS-oriented model. With that, it sounds like investors have jumped on the “It'll be like Adobe (Nasdaq:ADBE) all over again” train.

I'm not sure that's the right move right now. Autodesk already has a large percentage of its customers (around 70%) on a subscription plan, while Adobe's business was based far more on discrete purchases. On the other hand, Aspen Technology (Nasdaq:AZPN) and Cadence Design (Nasdaq:CDNS) had beneficial transitions that could point to longer-term potential for Autodesk. All of that said, I'd be careful about making the wholesale assumption that this is a completely positive move – nobody has shown yet that a SaaS model can be leveraged to the same sort of profitability as more traditional software models and lucrative maintenance revenue has long been a key part of the Autodesk story.

The Bottom Line
Just looking at Dassault and PTC, it would seem that Autodesk shares should be a little stronger than they are. Likewise, a discounted cash flow analysis using a growth assumption of about 6% suggests these shares are at least 10% undervalued. Add to that the possibility that global economic activity could improve more than analysts expect, and there's a bullish case to make. On the other hand, I would worry a bit about inflated expectations for the SaaS transition and the shares aren't exactly dirt cheap.

Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

comments powered by Disqus
Related Analysis
  1. Red Hat And Other Software Stocks That May Beat Revenue Estimates (RHT)
    Stock Analysis

    Red Hat And Other Software Stocks That May Beat Revenue Estimates (RHT)

  2. Check Point Software Could Be A Second-Half Rebounder
    Stock Analysis

    Check Point Software Could Be A Second-Half Rebounder

  3. The ADX Shows Strong Uptrends In These 4 Stocks
    Chart Advisor

    The ADX Shows Strong Uptrends In These 4 Stocks

  4. Downward Trend Channels for the Market Correction
    Chart Advisor

    Downward Trend Channels for the Market Correction

  5. Oil, Oil Stocks: What The Charts Are Saying
    Chart Advisor

    Oil, Oil Stocks: What The Charts Are Saying

Trading Center