Autodesk Inc. (NASDAQ:ADSK)’s core business is growing at a healthy pace, profitability is improving, and management is confident about the long-term outlook. These are some of the factors that prompted Berenberg to reiterate a Buy rating on the stock on September 1, even as it trimmed its price target to $333 from $335.
The positive stance signals the research firm’s confidence in the company’s outlook following an impressive second quarter. Revenues increased 16% year over year to $2.05 billion, while billings increased 10% to $1.85 billion. Revenue exceeded the high end of guidance, powered by strong gains in key areas of Architecture, Engineering, Construction & Operations (AECO).
Photo by AlphaTradeZone on Pexels
Improving Profitability Strengthens the Bull Case
Profitability is increasingly becoming one of Autodesk’s major strengths. The company’s non-GAAP operating margin increased to 41%, while non-GAAP earnings per share came in at $3.30, comfortably above Wall Street expectations of $3.12.
Autodesk is also generating substantial free cash flow. Free cash flow increased 24% year over year to $561 million, illustrating the company’s ability to convert its recurring revenue base into significant cash generation.
Another positive indicator is Autodesk’s current Remaining Performance Obligations (RPO), which increased 12% to $5.25 billion in the second quarter. The growth provides investors with greater visibility into future revenue and underscores the strength of Autodesk’s subscription-based business model.
Key Headwinds Remain
On September 1, Citi hiked its price target on the stock to $276 from $269, impressed by the solid second-quarter results. However, the research firm maintains a neutral rating, noting that there are few catalysts to accelerate organic growth compared with peers.
The competitive landscape is also changing rapidly.
In the past, Autodesk Inc. (NASDAQ:ADSK) primarily competed against traditional computer-aided design and engineering software companies. Today, however, the company encounters growing competition from AI-native design tools and cloud-native engineering platforms. Large technology companies incorporating AI into their productivity software are also increasing competitive pressure.
The second-quarter billing figures emphasize another concern. While revenue increased 16%, billings grew by only 10%. Revenue can remain strong for some time because of Autodesk’s large recurring subscription base, but slower billing growth may indicate less acceleration in new bookings and future demand.
What are Hedge Funds Doing?
Hedge fund holdings in Autodesk Inc. (NASDAQ:ADSK) slipped to 51 in the second quarter from 67 in the first quarter, according to the Insider Monkey Database. Nevertheless, Arrowstreet Capital, the largest hedge fund holder of the stock, increased its stake by 6% to $642.69 million, while AQR Capital Management also increased its stake by 31% to $336.79 million. Short interest in the stock as of September 1 stood at 3.92%, with 7.42 million shares sold short, indicating slight bearish positioning.
The Verdict
Autodesk is increasingly evolving from a mature CAD and design software company into a wider AI-powered software platform serving the physical-world economy. A solid recurring subscription revenue base, expanding margins, strong free cash flow, and significant exposure to industries such as construction, engineering, manufacturing, and infrastructure affirm underlying growth.
The acquisition of MaintainX is positioned to give the company a strong presence in operations and asset management and may provide an avenue for growth, although its ability to justify the deal’s premium valuation will depend on execution.
READ NEXT: Vertiv (VRT) Is Down From Its Peak. Is the Selloff Overdone and Is Uber (UBER) Losing Waymo Partnership? What Does It Mean in the Robotaxi Race?
Disclosure: None. Follow Insider Monkey on Google News.
