Is Autodesk a long term stock?
Autodesk (NASDAQ: ADSK) offers high-margin software that designers and architects depend on. The market recognizes Autodesk’s long history of exceptional performance: it trades at 42 times 12-month operating cash flow and 17 times 12-month sales, about triple its multiples of a year ago. is five years old. While this assessment sounds alarming at first glance, it’s rarely a bad time to buy the right company – and Autodesk is exactly that.
Customers need it
While Autodesk doesn’t look cheap, it provides service at the heart of its customers’ day-to-day operations. Architects, engineers, construction workers, interior designers and many more trust Autodesk systems to get their daily work done. Autodesk provides the industry standard for computer-aided design (CAD) programs, essential for AEC companies to virtually design and test the actual applications of their own projects. It offers a comprehensive yet easy-to-use suite of software to enable these industries to operate efficiently.
The management does not offer specific renewal rates for all of its customers. But on the second quarter conference call, CFO Scott Herren mentioned that renewal rates among business accounts are close to 100%.
To complement this strength, Autodesk is already increasing its revenue within its existing customer base, as underscored by Autodesk’s constant net revenue retention rate of over 100%. Customers subscribe to additional Autodesk services or accept incremental price increases for services they already use. Regardless, with over 18 million active users and consistently high renewal rates, Autodesk requires very little additional investment to support organic growth. At this point, re-subscribing to Autodesk software is usual for most customers. This allows Autodesk to spend less money trying to retain customers or sell additional products, and instead spend money on constantly improving existing products. This should allow Autodesk’s profits to increase as a percentage of sales over the next several years.
The university system
At the university level, institutions constantly want to develop and produce the best workers in their class in various fields. If the university is to provide the best potential employees for the workforce, it must teach and train its students in the systems they will need to know about when they have employment opportunities. In most cases, since Autodesk products are the industry standard, this means that universities require their students to learn various Autodesk systems. For Autodesk, this creates a funnel of potentially lifelong users, and they pay very little to acquire those customers.
On the other hand, if an architectural or construction company is looking for new employees, the majority of applicants will likely come from universities. As a result, incoming employees are now used to Autodesk systems, making it very expensive to abandon Autodesk for most companies. Whether it’s the cost of downtime, the expense of training and teaching employees a new system, or potential production delays due to the company’s new software, it’s just too much to bear. for most businesses. So most businesses simply choose to resubscribe.
A more profitable model
In 2016, Autodesk announced that it would be moving from a license revenue model to a subscription revenue model. Building this strategy and getting customers to shift increased spending to Autodesk in the short term, but it’s a much more profitable strategy in the long term. This model facilitates software updates on Autodesk’s side and makes customer onboarding less expensive.
When we look at Autodesk’s current rating, it’s important to note the shift from license to subscription. A more profitable strategy means a higher reinvestment potential. Since this software-as-a-service model requires less running expenses, every dollar of revenue is more likely to flow into the bottom line, increasing Autodesk’s profitability.
As investors, we should expect higher valuation multiples across the board compared to Autodesk in the past. As long as Autodesk’s renewal rate stays high and customers keep paying more, it should be fine for a long time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.