- Autodesk is currently finishing the transition phase to a full SaaS business model.
- I compare Autodesk to a similar company that recently underwent this change and compare the current performance.
- I look to see if we can use the comparison stock performance as a guide to what the next three years could hold for Autodesk.
Autodesk (NASDAQ:ADSK) has recently made a large change to their product selling approach, officially making the switch to a full SaaS model in 2016 after a brief period of gradual transition. In an attempt to predict future performance, I've used a few popular metrics to compare the transition to a SaaS business model between Autodesk and a company that underwent this change in 2013, Adobe (ADBE). Due to Adobe being roughly 3 years ahead in the transition to this model, I explore the feasibility of using ADBE's stock performance over the last 3 years as a prediction model for ADSK in the coming 3 years.
This article highlights and expands on points discussed in a previous article of mine, "An Engineer's Portfolio: Building A Strong Foundation."
Autodesk has one of the largest moats of all public companies in an industry that is sitting on a launching pad for the next several years, construction. Autodesk offers a suite of software applications including the applications Civil 3D, AutoCAD, and Revit. It is one of the first 2D and 3D software application providers for architecture and construction and has solidified itself as a necessity. Originally relying on one-time software purchase sales, ADSK has now shifted to the ever-popular SaaS model, instituting annual software licensing and integration into the cloud. The scalability and cost benefits could not have come at a better time as the United States and many countries around the world look to accelerate infrastructure spending. Operating with exceptional profitability, as rated by Seeking Alpha, Autodesk will be able to translate this growth in revenue into large increases in profit.
Source: Seeking Alpha
An underrated and great way to identify trends and popular products is to look at skills/requirements listed in new job postings. Speaking from previous personal job searching experience, there is a distinct common link between nearly all mechanical and civil engineering job openings, Autodesk, and this trend still exists. I am hard-pressed to find any positions on job posting websites that don't require knowledge and experience with either Civil3D, AutoCAD, or Revit. Shown below are the first four job positions found when searching for "Civil Engineer" on LinkedIn jobs. As jobs in these fields look to quickly grow in the coming years due to infrastructure bills, Autodesk will be able to capitalize on the high margins and scalability of their products.
Source: Created by Author using LinkedIn Job Search
Operating for nearly 40 years, Autodesk has continued to adapt and expand over the course of its lifetime. Growing from just a single software application, the company has both vertically and horizontally integrated to become a 3D modeling behemoth with dozens of applications and services generating nearly $4 billion in annual revenues. Since inception, revenues have increased at a fast pace and have made many investors happy over the years as evidenced below.
Growth into industries other than construction and architecture has become prominent in recent years. Tesla (TSLA) uses the Autodesk suite as the official company software and has lauded its capability. With its integrated and easy-to-use electrical and wiring design functions, Autodesk may have further adoption in the auto industry as new EV companies continue to enter the market. Recently, another strength of their software lineup has been identified for its usefulness in one of the hottest current topics discussed around the world, the Metaverse. This is evidenced by ADSK's heavy weighting in the newly created Metaverse ETF (META).
Source: Roundhill Investments
Additionally, a recent development that has caught my eye is a new acquisition made by the company. The recently announced acquisition of ProEst creates an interesting expansion to Autodesk's business model. ProEst provides cloud-based services in the planning and cost estimation of new construction builds. By expanding their cloud footprint and entering into the pre-construction business, Autodesk will have an intriguing opportunity to vertically integrate in the construction industry. By providing end-to-end construction cycle capability, there is an increased attraction to use Autodesk for pre-construction versus more one-dimensional competitors.
At first glance Adobe may not seem like a suitable comparison as a similar company to Autodesk, however, if we dig deeper it starts to look more feasible. To begin, Adobe is an industry staple and leader in virtual documentation creation and editing, similar to Autodesk having a market-leading position in 3D modeling and analysis. Secondly, Adobe's business model is anchored by its core products and has continually expanded on current offerings while also expanding into synergistic new products, much like the business model of Autodesk. Lastly, both companies have benefited from the first-mover status in their respective sectors making themselves necessities in their industry.
ADBE also recently transitioned from a one-time purchase software-based business model to a subscription model, coupling this information along with the company comparisons made, I believe it is reasonable to use ADBE as a high-level gauge for future trends in ADSK. The great benefit of using Adobe as a comparison is the fact they transitioned to SaaS nearly 3 years before ADSK, allowing us to see how this change has impacted their income statements, valuation multiples, and stock performance on a 3-year longer runway than that of Autodesk.
Performance Analysis and Trends
Depicted below, we can see the clear drop in operating margins for Adobe beginning in 2013 as they moved to a complete subscription-based model. This same dip begins in Autodesk in 2015 as they began to transition to subscriptions. We should expect to see this dip for each company due to the change in revenues versus cost, full one-time payments were suddenly broken up into smaller, long-term payments while the sales and operating costs continued to incrementally rise with increasing product volumes. Over time as the compounding annual payments stack up, the annual revenues eventually reach back to previous levels and improve the operating margins. As evidenced by ADBE, the reduction in sales costs to retain sales and the reduced operating expenses in scalability due to cloud integration have allowed for operating margins to expand significantly beyond levels observed before the subscription model. Using Adobe as a crystal ball looking 3 years in the future, there appears to be potential for substantial margin expansion as ADSK is just now getting back to pre-SaaS margins (in almost exactly the same 4-5 year time frame it took ADBE to achieve the same feat before proceeding to substantially increase their margins above historic levels).
Another important metric I would like to investigate is the P/S ratio of Adobe as the company has evolved and if ADSK has experienced a similar change. As we can see below, the market has rewarded both stocks with larger multiples as they have shifted to a more profitable business model. Additionally, we can see an extremely close correlation between ADSK and a 3-year delayed trend in ADBE. Adobe experienced a visible expansion in the P/S multiple upon the announced change to SaaS, followed by a ~3-year stagnation as the company consolidated revenues from the subscription model. ADSK remarkably seems to follow nearly the exact same path from 2018-2021. To add even more correlation, ADSK's P/S multiple is almost exactly that of ADBE's 3 years ago. If this correlation were to continue, it appears that Autodesk may be rewarded with an even further expansion in the P/S ratio in the coming years.
Most investors will likely scoff at ADSK's P/S valuation, understandably viewing it as much too high. However, if we compare to other SaaS software companies in the market today, it looks as if Autodesk's valuation is average and possibly even low based on relativity. At the very least, this should relieve some reservations on investing in ADSK based on valuation multiples.
As a stock trading at a high multiple compared to the rest of the market, ADSK is at risk of a larger drop in an economic downturn. However, I believe Autodesk's industry necessity and rapidly expanding bottom should allow for a softer cushion. The move into the cloud also brings an increased security risk, as we have seen many times, even from some of the largest companies in the world, sensitive data breaches do occur. The exposure of customer confidential information could be a risk for Autodesk as they move to the cloud. Although, I believe this will be a common risk among competitors as cloud migration increases across the industry and because of the consolidation of major cloud service providers, with roughly 61% of the market belonging to Amazon, Microsoft, and Google.
Lastly, there is always the risk of becoming obsolete against new competitor products or the entry of new market players. In my experience, Autodesk has one of the largest moats in software and has insulated itself well against competition. Regardless, it is always important to keep in mind the risks that come with any investment and to stay updated on new developments.
After assessing the strength of Autodesk's business and generating a reasonable comparison to a similar publicly-traded company, I am given confidence in the future of ADSK's stock performance. Multiple positive factors are in favor of future performance when we combine the potential margin expansion, P/S multiple expansion, and strong projected revenue growth. Combining these factors I believe the analyst estimates of 25-30% earnings growth are very achievable, if not conservative. The stock has delivered a flat performance over the past year despite experiencing several positive developments, creating a good opportunity for entering a position. In the short, medium, and long term ADSK is well-positioned to continue delivering historically above-market returns.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ADSK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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