- Autodesk's heavy exposure to the manufacturing and construction industries makes it one of the most heavily-impacted software companies to the coronavirus pandemic.
- The company has called for billings to be negative in FY21, starting with Q2. In particular, Autodesk's key multi-year contracts are at risk.
- Shares look expensive at ~10x forward revenue and ~30x forward FCF.
- There's no doubt that Autodesk remains a key technology, but investors will be able to get in at a better price later.
It's almost unfathomable to believe that Autodesk (NASDAQ:ADSK), the maker of computer-aided design (CAD) software that is popularly used among engineers across the globe, is back to trading at all-time highs. Shares have rocketed up more than 60% from their nadir reached in March, when investors were rightfully worried about the impacts of construction and manufacturing on Autodesk's end-customer demand.
The company recently released first-quarter earnings results that more or less confirmed these concerns. Though Autodesk still remains optimistic on the value proposition and criticality of its product (this was never in doubt; Autodesk remains the world's premier CAD software), its prognostications for the remainder of the fiscal year don't show any clear path to a normalization in its business.
Investors, on the other hand, have treated Autodesk's recovery as a foregone conclusion. Shares have risen nearly 10% after the company reported Q1 results alone (which, when taking management's commentary about FY21 into consideration, weren't really that great) and are back at all-time highs.
My prior article on Autodesk focused on the company's overweight exposure to cyclical industries, with about two-thirds of its revenue coming from the manufacturing and construction verticals. Now that we've seen Autodesk's Q1 results and updated guidance, we can more clearly flesh out what the remainder of the year looks like for Autodesk.
My overall view remains unchanged: though many enterprise software companies have reported that sales trends began to normalize in April and May, the road to recovery for Autodesk remains more unclear. Looking longer-term, Autodesk is still a fantastic company. It has become the gold standard for CAD software, used both professionally and as the program for instruction at many engineering schools across the world. I do think, however, that the stock's rally since March has been indiscriminate given the serious fundamental risks facing the company this year, and investors should be able to nab Autodesk at a better price later on.
Let's now take an updated look at how Autodesk's business has trended so far. Surprisingly, Autodesk's first-quarter results came out on top. Take a look at the company's revenue growth by segment in the chart below:
Autodesk still managed to grow revenues at 20% y/y to $885.7 million, beating Wall Street's estimates of $868.0 million (+18% y/y) by a two-point margin. Surprisingly, Autodesk's AEC (construction) vertical still managed 26% y/y growth.
However, we must recall that the majority of Autodesk's revenue comes from renewals. Though Autodesk's Q1 did cover both March and April (the months likely to be hardest-hit by the pandemic), Autodesk's renewing customers aren't likely to react that quickly to their subscriptions as to hit Autodesk's revenue immediately in Q1 - indeed, the company commented that so far it hasn't seen substantial changes in renewal rates. However, the company does expect billings and renewal trends to soften in Q2 and beyond.
Demand commentary from CFO Scott Herren's prepared remarks on the Q1 earnings call helps to shed a light on the traction Autodesk is seeing among its clients:
During the quarter renewal rate held relatively steady, whereas new business not surprisingly slowed down in the second half of Q1. However, the impact on our business has not been uniform by geography or industry. [...] Lastly we saw a modest decrease in multi-year deals toward the end of the quarter, although many customers continued to move forward with multi year commitments, even in the current environment [...]
Regarding trends during the year, we expect the second quarters new business activity to be the most impacted by the pandemic. Our pipeline entering the second quarter is strong and growing. But we're cautious about new business close rates. The upper end of our range assumes a swift recovery in new business in the third quarter and continued improvement into the fourth quarter with full year new unit volume growing lastly.
At the lower end of the range, we are modeling deeper impact on second quarter sales, fall by a slower recovery in the third quarter and further improvement in the fourth with full year, new units posting a modest year-over-year decline."
There's a couple key concerns, highlighted above, to note from the commentary here. One of the successes that Autodesk has achieved in the past couple of years has been its conversion into a primarily subscription-oriented, multi-year contract company (whereas previously companies had purchased Autodesk "the old way" via perpetual licenses and support contracts). Obviously, uncertainty over the future of construction and manufacturing projects has made these companies wary of long-term commitments. The shortening of overall contract lengths may spur greater churn/less renewals in the future, in addition to impacting current-year billings.
Guidance update; billings to fall negative in FY21
Autodesk's revised guidance for FY21 reflects that grim reality. Take a look at the updated estimates below:
Key takeaway here: Autodesk expects its billings in the current fiscal year to contract by up to as much as -3% y/y. Meanwhile, the company had originally expected a billings growth range of 11-13% y/y - which means the coronavirus' impact on the company is worth about fifteen points of growth. Of course, some of this is due to the duration impact from customers opting for shorter contracts - but Autodesk's revenue forecast for the year is also down, from a prior guidance range of 20-22% y/y to 12-15% y/y now, or approximately an eight-point impact. Autodesk is also expecting its net revenue retention rates to decline to a range of 100-110%, which is below its historical target range between 110-120%. For a business that relies so heavily on renewals and existing clients, this is concerning.
Considering the weight of the pandemic's expected impact on Autodesk, it's unclear why the stock is trading back at all-time highs. Of course, stock valuations are based on future prospects and not just current-year results, especially if this is a year that is colored by pandemic impact. However, history has shown us that the construction industry in particular tends to have long-winded recoveries. In residential construction, for example, even after the housing market crashed in 2008, supply of new homes has lagged behind demand even in the present day, which is one of the main factors pushing up house prices.
Autodesk's modeling notes accompanying its guidance, meanwhile, bakes in a "swift recovery in H2" for new business - leading us to believe that Autodesk's internal expectations might be a bit optimistic.
At present share prices near $210, Autodesk has a market cap of $46.1 billion. After netting off the $1.47 billion of cash and $1.64 billion indent, Autodesk's resulting enterprise value is $46.27 billion.
Versus the midpoint of Autodesk's current-year revenue estimates, this represents a valuation of 12.4x EV/FY21 revenues. And against its FCF estimate of $1.30-$1.40 billion, Autodesk's cash flow multiple is 34.3x EV/FY21 FCF. It's worth noting as well that using FY21 free cash flow doesn't necessarily put us in danger of using a deflated trough year FCF, as last year Autodesk also generated free cash flow of $1.36 billion.
Despite our belief in Autodesk's long-term value and its criticality in the construction and manufacturing space, we can't help but to think investors will have an opportunity to nab shares of this company at a much lower price later on in the year. As Autodesk itself acknowledged, revenue and billings will become hardest-hit in Q2 - and once investors digest that reality, shares may move downward in tandem.
Many software companies have already offered hints that their business is normalizing. By virtue of the verticals it serves, however, Autodesk has a more challenging and unpredictable path to recovery. Yet its share price has made a full bounce back - so continued upside, in my view, will be difficult to come by. Keep a close eye on price movements in this stock, but don't feel tempted to buy into the upward momentum.
This article was written by
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