Autodesk, Inc. (NASDAQ:ADSK) is known for its computer aided design (CAD) software, which has been the industry standard of engineers for years. Although the company has very strong fundamentals, a market-leading position, and nice growth projections, the high valuation of the stock (over 20 times earnings) struck me as a bit too high, so I decided to investigate a little. With shares just under their 52-week high, what is the best course of action ahead of the company’s earnings report on Thursday, May 16?
Autodesk, Inc. (NASDAQ:ADSK)’s CAD and product lifecycle management (PLM) software is used to make and refine designs in the manufacturing, architectural, and engineering fields. The company’s most well known product is AutoCAD, which is used by engineers worldwide. AutoCAD 2014, the current version (technically version 19.1) supports 2D and 3D design, and the software sure has come a long way since its initial release in 1982, or even since I used it in my drafting courses in college about a decade ago.
Autodesk, Inc. (NASDAQ:ADSK) sells its products all over the world, both through retailers and directly to consumers, although sales through retailers make up the bulk (85%) of the company’s revenues. The company is truly a worldwide enterprise, with 36% of revenues coming from North and South America, 38% from Europe, the Middle East, and Africa, and 28% from Asia.
The company’s recent growth efforts have been in the form of a transition to cloud-based and mobile-based software products, and incorporating simulation and visualization into its products as computers become more powerful. Cloud-based products also reduce the potential for piracy, which has historically been one of the biggest problems with software companies. The company is also actively growing its international sales, particularly in emerging markets, where a large portion of future growth is expected to come from.
At around 20.5 times last year’s earnings, Autodesk, Inc. (NASDAQ:ADSK) may sound a bit expensive, especially for such an established and somewhat mature company. First of all, the 13.6% annual forward earnings growth rate that is projected by the consensus of analysts covering the company sounds pretty good. Second, when taking into account the $1.2 billion in net cash (cash minus debt) that is on Autodesk’s balance sheet, the valuation doesn’t look quite so expensive. Backing out the cash, shares trade for 17.7 times earnings, which looks a little more palatable, especially considering the forward growth rate.
To get an idea of whether or not Autodesk, Inc. (NASDAQ:ADSK) is truly a good deal, we need to examine some of the alternatives. First I’d like to take a look at ANSYS, Inc. (NASDAQ:ANSS), which is one of the leaders in simulation software. ANSYS’s products are used primarily for “virtual prototyping;” that is, their software allows companies to see how their products will behave in the real world before they even build them. Unlike Autodesk, most of ANSYS, Inc. (NASDAQ:ANSS)’s business comes in the form of direct sales.