Should Value Investors Buy Autodesk (ADSK) Stock?

Rhizome Partners recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 18.3% for the second quarter (net of fees), underperforming its benchmark, the S&P 500 Index which returned 20.6% in the same quarter. You should check out Rhizome Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Rhizome Partners highlighted a few stocks and Autodesk Inc. (NASDAQ:ADSK) is one of them. Autodesk Inc. (NASDAQ:ADSK) is a software company. Year-to-date, Autodesk Inc. (NASDAQ:ADSK) stock gained 37.2% and on August 21st it had a closing price of $248.27. Here is what Rhizome Partners said:

“AutoDesk (3.0% Position Size) – AutoDesk is a Computer Aided Design (CAD) software provider that has largely transitioned from a perpetual license model to a Software‐As‐A‐Service (SaaS) model. I personally used this software during my short stint as a HVAC engineer and during my undergraduate years. It is an essential software used by HVAC engineers and architects. Because the ecosystem primarily uses AutoCAD, this makes it nearly impossible for a competing CAD program to encroach the existing user base. We paid a roughly 25x P/FCF multiple for this business and we owe you an explanation as to why this is likely cheap. We will use a real estate analogy to demonstrate why AutoDesk was cheap.

AutoDesk had 16mm active users but only 4mm paid subscribers. 2mm of the non SaaS users were customers who bought a perpetual license and will likely switch to a SaaS subscription at some point. The other 10 million users essentially use pirated copies. AutoDesk knows their IP addresses and can shut down the software if they wanted to. Thus, AutoDesk has the runway to quadruple its SaaS subscribers over time. We are also confident that AutoDesk can increase subscription prices by 2‐3% a year and create additional value by making tuck‐in acquisitions that they can cross sell to their existing customers.

If the existing AutoDesk business was an apartment building in a great neighborhood, we basically paid a 4% cap rate for the existing house. But we get three additional parcels of land for free. Unlike the real estate development business, software with high switching costs is one of the best businesses because the incremental gross and operating margin on a new AutoDesk subscriber is over 90% and likely 50% respectively. This is akin to the real estate business where putting up new apartment buildings costs less than 50% of the future buildings’ value. Despite a mid‐20s P/FCF multiple, we can arrive at a mid‐single digit P/FCF in 2025 due to the predicted high growth rate and high incremental operating margin. In short, we are underwriting to a 3‐4 bagger in 5 years in an asset light and high switching cost business with a dominant software that I have personally used before. Lastly, the base rate of success is very high for companies transitioning from traditional perpetual licenses to SaaS models. Prior success examples include Microsoft and Adobe.

What should we do now that AutoDesk is up 54%? Our intention is to hold onto the shares and capture the upside as AutoDesk converts the remaining 12mm users into SaaS subscribers. There is a long run way for AutoDesk to create shareholder value in the next 4‐5 years.”

11 Highest Paying Countries for Information Technology Professionals

Production Perig/

Earlier this month, we published an article revealing that Forager Funds is bullish about Autodesk Inc. (NASDAQ:ADSK) stock. The investment firm believes that the company’s profits can grow close to 30% per annum.

In Q1 2020, the number of bullish hedge fund positions on Autodesk Inc. (NASDAQ:ADSK) stock increased by about 2% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Autodesk’s growth potential. Our calculations showed that Autodesk Inc. (NASDAQ:ADSK) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out ideas like this under-the-radar stock to identify the next tenbagger. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.