Musings on Autodesk…

I got an investor deck for a startup that was going to “disrupt” Autodesk. Pfft is my first thought. They have an enormous operational moat I replied and…then thought in the back of my head, why not look at Autodesk (NASDAQ: ADSK) itself. But it slipped my mind. Who thinks of Autodesk these days?

Then Alexander Eule of Barron’s wrote September 26th about Autodesk, which may as well be known as AutoCAD, after their dominant engineering design suite. They are undergoing a pricing change, shifting from boxed-perpetual to cloud-licensed product. Adobe is in the midst of completing their own pricing transition, to much applause from the street. The primary source for the article is Rob Nicoski of Disciplined Growth Investors who sees, if the transition is well executed, “a company with earnings power of more than $4 a share in five years.”

Aside from a pricing transition it’s pretty easy to conceptualize a large growth driver in the coming years: widespread – maybe even consumer adoption of? – 3D printing.

Autodesk over the years

Autodesk over the years

Does the Adobe chart presage anything for Autodesk investors?

ADBE max chart oct 2015

Beyond the fashion of cloud applications – though that’s a relevant consideration for investors looking to have multiples expand, the cloud subscriptions can also significantly reduce the piracy rate that afflicts so much high value software. In Autodesk’s case, that’s estimated at 43% (in this investor report, slide 20)

Autodesk like most tech companies has the problem of explaining GAAP to non-GAAP (meaning, huge employee option grants off the books) expenses but assuming market reception to his remains neutral, the product & cash roadmap is intriguing. From the investor presentation at 2015’s investor day in September:

ADSK key takeaways from Sep 2015 shareholder meeting

adsk recurring rev and projections

These numbers bear a great deal of similarity to the analyst estimates’ provided for stories in Barron’s so the likelihood of them should be taken with a grain of salt. That said, engineering and design software is awfully sticky, and deeply embedded into business processes that it would be harder for a start up to disrupt.

Autodesk has under-performed, severely, similar design-oriented software firms like Adobe & Ansys: almost no return in the last ten years versus a 300%+ and 150%+ return.

Autodesk, Adobe, Ansys comparison 10 year

Adobe’s break to new highs in December 2012 at around 36 presaged an enormous run to the low 80s today – though perhaps a bit ahead of itself now, with an unfavorably received earnings report tonight.

After a decade of lackluster performance there’s a lot of execution to prove. Waiting for a new high in ADSK might leave a lot on the table but that’s preferable to dead money for another ten years. With a market generally threatening a downtrend, there is no particular need to jump in now either. This is a classic case of wanting to follow quarterly reports to see when there is a good market response to successful strategy implementation. One is tempted to nibble at it now.

That said, if the product pricing strategy works, and the engineering software market widens or deepens, long dated call options are an interesting play. Open interest is high in the ADSK Jan 2017 60 and 65 calls, with a last ask of $2.11 & $1.39 respectively. Jan 2018 calls are more thinly traded, with a 70 strike at $2.60 ask, $2.20 last. Maybe not bad for the pivot potential in a stock that was at 63 not so long ago this year until cash flow fears materialized.

 

 

 

 

 

 

 

 

 

 

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