High-performing companies typically trade at premium valuations. But Wall Street can be fickle. Occasionally, shares of a great company can be had for a very average price. That's happening now with Autodesk (ADSK -0.90%), the provider of design software for the engineering, architecture, and construction industries. Shares are down after the company gave weak guidance in its recent earnings presentation. It's now 44% below the all-time high from mid-2021.
The recent leg of the fall looks partly due to a change in how Autodesk bills clients. But it did something similar less than a decade ago. The stock rocketed higher in the years after that. That has me asking whether today's price is another buying opportunity.
Cash flow cliff, part two
We've seen this movie before. In 2014, the company began transitioning away from perpetual licenses -- buying compact discs with software that lasted forever once installed -- to subscription billing. The stock fell 34% as the company completed the move in 2016. It's up more than fourfold since. Looking back, the temporary impact to free cash flow is obvious, as is the rebound. But something important changed over that span.
ADSK Free Cash Flow data by YCharts
The free cash flow margin exploded. Since the beginning of 2020, Autodesk has been turning about 37% of revenue into free cash flow. That's better than Microsoft, a famously prolific free cash flow generator.
Preparing for another drop
Despite the previous success, investing is about the future. And just because something makes sense over the long term doesn't mean Wall Street won't react negatively in the short term. But the issue shouldn't be a surprise.
Management has been talking up the new billing practices since at least August 2021. Last May, an analyst on the first-quarter earnings call mentioned the coming valley of cash flow and subsequent rebound in fiscal 2025 -- the 12 months ending in January of that year. That valley is dead ahead. The following chart shows the midpoint of management's guidance for 2024 revenue and free cash flow. Note the drop.
Data source: Autodesk. Chart by author.
Shares are now selling for the lowest multiple of free cash flow since that billing announcement nearly a decade ago. It seems cheap. But there is an important catch.
Doing some tricky math
The shift in how clients are billed changes the way those dollars show up in financial statements. And that has a big impact on free cash flow. According to CFO Debbie Clifford, free cash flow in fiscal 2023 was aided to the tune of $790 million. Fiscal 2024 will be hurt by $300 million. There will be some additional drag in fiscal 2025 as well.
That makes it difficult to see where free cash flow will settle in a few years. Management did say revenue will grow between 10% and 15%, with free cash flow margins between 30% and 35% over the next several years.
That's helpful. Looking beyond the valley, the conservative end of that guidance puts revenue at $6.5 billion and free cash flow near $2 billion -- essentially what it is now -- by January 2026. The high end would add about $500 million to that number.
It might be worth the wait
Investors are nervous about the combination of a weakening economic backdrop and the free cash flow outlook. That might be an opportunity for those with a long-term focus. Autodesk has proved itself to be an indispensable part of many industries' design and manufacturing process -- it isn't going anywhere. And it has managed this billing transition before.
But buying shares today is likely to require patience. Until free cash flow gets back to current levels, and those growth projections prove true, negative sentiment could persist. That might mean a year or two of a wait-and-see approach. That seems like a long time. But if history is any guide, there are market-beating returns on the other side of Autodesk's cash flow valley.
