Autodesk's (ADSK -0.90%) stock dropped 3% during after-hours trading on Nov. 21 after the cloud-based software company posted its latest earnings report. For the third quarter of fiscal 2024, which ended on Oct. 31, the company's revenue rose 10% year over year to $1.41 billion and exceeded analysts' expectations by $20 million. Adjusted earnings per share (EPS) grew 22% to $2.07 and also cleared the consensus forecast by $0.08.
Those headline numbers looked stable. Does Autodesk's post-earnings pullback represent a good buying opportunity for long-term investors? Let's review its growth rates, near-term challenges, and valuation to decide.
Image source: Getty Images.
Another quarter of accelerating growth
Autodesk splits its sprawling portfolio of cloud-based software into four major categories -- and it locks in most of its customers with sticky cloud-based subscriptions.
- Architecture, engineering, and construction (AEC)
- AutoCAD and AutoCAD LT
- Manufacturing (MFG)
- Media and entertainment (M&E)
During the third quarter, 48% of its revenue came from the AEC group, 26% came from the AutoCAD group, 19% came from the MFG group, and 5% came from the M&E group. The remaining 2% came from other products. Here's how Autodesk's four core businesses fared over the past year.
|
Segment Revenue Growth Year Over Year |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
AEC |
13% |
11% |
8% |
11% |
17% |
|
AutoCAD |
10% |
9% |
7% |
6% |
5% |
|
MFG |
13% |
4% |
9% |
6% |
6% |
|
M&E |
24% |
(10%) |
4% |
4% |
(6%) |
|
Total |
14% |
9% |
8% |
9% |
10% |
Data source: Autodesk. Table by author.
Autodesk's revenue rose 16% in fiscal 2022 (which ended in January 2022) and grew 14% in fiscal 2023. Its growth gradually cooled off over the past year as the macro headwinds forced companies to rein in their spending and sign shorter-term contracts. The strong U.S. dollar exacerbated that pressure since the company still generated 63% of its revenue from its international markets in the third quarter.
Despite all that pressure, Autodesk's revenue growth still accelerated over the past two quarters as its core AEC business recovered. During the latest conference call, CEO Andrew Anagnost attributed the segment's acceleration to its "good momentum" across the "transportation, water infrastructure, and construction" markets.
Investors should still brace for slower growth
Autodesk expects the macroeconomic and currency headwinds to persist throughout the rest of fiscal 2024 and 2025 but is expanding its new "Flex" model -- which allows its subscribers to add more usage-based services with "Flex tokens" -- to offset some of that pressure. Those tokens could enable Autodesk to squeeze more revenue from its existing subscribers without locking them into bigger or longer-term contracts.
That plan sounds promising, but Autodesk expects its revenue to only rise 9% in fiscal 2024 and "more than 9%" in fiscal 2025 as it struggles to gain new subscribers and lock in higher-value contracts with bigger upfront payments. Analysts had also expected about 9% growth in fiscal 2024 -- but they were hoping for 11% growth in fiscal 2025.
Focusing on the factors it can control
Autodesk is reining in its spending as revenue growth cools off. That's why its adjusted operating margin rose sequentially and year over year to 39% in the third quarter as its adjusted EPS growth accelerated for the second straight quarter.
|
Metric |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
|---|---|---|---|---|---|
|
Adjusted operating margin |
36% |
36% |
32% |
36% |
39% |
|
Adjusted EPS growth (year over year) |
27% |
24% |
8% |
16% |
22% |
Data source: Autodesk. Table by author.
For the full year, the company expects its adjusted operating margin to hold steady at about 36% as its adjusted EPS grows 12%-13%. Analysts expect its adjusted EPS to rise about 13% in both fiscal 2024 and fiscal 2025.
Reasonably valued stock, but lacks near-term catalysts
Autodesk's stock looks reasonably valued at 26 times forward earnings. Adobe, which competes against Autodesk in the digital media market, is growing slightly faster but trades at 34 times forward earnings.
However, the bulls are paying a premium for Adobe because it has established a foothold in the growing generative artificial intelligence (AI) market with its Firefly platform. Autodesk recently unveiled its similar "Autodesk AI" platform to automate repetitive tasks and create more AI-generated content but hasn't generated as much excitement as Adobe yet. Autodesk's lackluster outlook for fiscal 2025 also suggests its new AI services won't meaningfully boost its near-term revenue.
Therefore, I can't recommend buying Autodesk when it lacks near-term catalysts and other higher-quality tech stocks are still on sale. For Autodesk to be worth buying again, its growth needs to accelerate or its stock needs to get a lot cheaper.
