Autodesk

ADSK : NASDAQ : US$48.32
BUY 
Target: US$60.00

COMPANY DESCRIPTION:
Autodesk is a global design software company that sells
high-function, low-cost 2D and 3D computer-aided design
(CAD) applications. The firm also provides visualization
and simulation tools, which in conjunction with the
company’s design apps, enable customers to experience
their ideas early in the design process through the
development and analysis of virtual prototypes.

 

Technology — Enterprise Software — Applications
TRENDS IN FAVOR, STOCK LIKELY TO FOLLOW SUIT; UPGRADE TO BUY,
TARGET TO $60
Investment thesis
There are enough company-specific changes, augmented by what we believe
will be a multi-year macro tailwind in commercial construction, that ADSK
appears poised to resume an advance that we believe will take the stock back to
its old nearly $60 highs in fairly short order. We are equally bullish about the
possibility of a multi-year transition to a more predictable model that we
forecast to easily clear the 30% operating margin threshold in calendar 2017.
 Best-in-class portfolio. Taken as a whole, we believe ADSK has the design
industry’s most complete Design, Simulation and Visualization suite.
 Model switch means greater predictability and likely higher realized per
customer revenues. Much like the Adobe transition, we expect Autodesk’s
transition to begin slowly, if not occasionally haltingly, and then accelerate,
pushing recurring revenues to nearly 80% in late calendar 2017.
 Optionality from cloud PLM and simulation. Design collaboration, which is
really what PLM is, is tailor made for the cloud. Simulation, especially for
small- and mid-sized firms without dedicated CPU capacity, is also a great
use case for cloud. ADSK is the largest firm with credible cloud offerings in
these areas.
 A lot of moving parts, but the relevant ones subscription growth and cash
flow growth should move in the right direction. Specifically, our long-term
modeling says subscriptions and cash flow advance at a mid-to-high teens
pace for the next five years. In CY17/FY18E Autodesk should evolve to
become a less cyclical 30% non-GAAP, 32-35% operating cash flow margin
business with gradually accelerating mid-single-digit to total revenue growth.

 Therefore, we believe ADSK deserves consideration for a growth portfolio. While we
are not making a “called shot” on the quarter, it would not surprise us that ADSK’s
management will make sufficiently positive commentary on Thursday night’s earnings
call that the stock could advance on Friday.
Valuation and price target
Our new $60 price target (up from $52) is based on a 23x multiple applied to our
F2016/C2015 FCF per share estimate of $2.32 plus approximately $6.00 in prospective net
cash per share.
For perspective, looking out further, if we use this same 23x multiple, which could prove
conservative as investors give ADSK full credit for the transition to subscription, on
F2018/C2017 estimates, which we will be looking at in ~18 months, it implies a stock in
the $75-80 range. The math is roughly $3.07B in F2018 revenue at a 30% operating
margin, taxed at 25% over 245M shares, plus $11-13 per share in prospective net cash per
share. This implies a >50% return from current levels over the next 18-24 months

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