I think the stock is attractive, but you must be aware of a high amount of cyclical risk. Macro-economic discussion is never far from the agenda with Autodesk. Emerging market performance outside China was disappointing again, and this has been a running theme throughout the year for Autodesk. Europe saw the usual story of North good, South weak and I can’t see that changing anytime soon. The Americas were described as being ‘uneven,’ which is really a euphemism for saying that Brazil was weak and the US declined. I suspect the US weakness is a function of manufacturing deciding to hold off investing while the fiscal cliff issue was being resolved.
US growth is likely to snap back for Autodesk because the company stated that backlog was strong in the US, the fiscal cliff and sequestration issues will be resolved, and there are real signs of a recovery in general construction activity. With that said the company’s reliance on emerging market growth still remains.
As for the SaaS proposition it’s interesting that Autodesk is taking a slightly different route to Adobe. Both are moving to SaaS, but Adobe has pushed the subscription model more than Autodesk. I’ve discussed Adobe in more detail here, turning back to Autodesk and how its suite sales are expanding.
Thinking about the long term, the potential for Autodesk to ‘do an Adobe’ and move towards the subscription based model is there, but I guess this option will be partly a function of how Autodesk views its customer behavior and the likelihood of take-up. The evidence from early adopters of SaaS like Intuit is that the lifetime value of a customer will increase as retention ratios rise. In addition, Intuit has seen favorable movements in customer acquisition costs. In the long term I expect Autodesk to benefit in the same way as these two companies.
Where Next for Autodesk?
Times have been difficult for Autodesk, but this business has generated over $1.5 billion in free cash flow over the last three years and has strong secular growth prospects from the move to SaaS. To put that figure into context the current enterprise value of the company is around $7 billion. The question is not over its current evaluation (it is cheap) but rather what price you are willing to pay for the cyclical risk and emerging market and European exposure?
If you are confident of the global economy in 2013 then Autodesk is exactly the kind of stock you should be buying. For those of us who hedge and like to balance risk (upside and downside) I will consider it on the cyclical risk end of my portfolio when I have some space on the roster.
The article Growth Is Back on Track at This Cloud Play originally appeared on Fool.com and is written by Lee Samaha.
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