Should You Buy Autodesk Stock? 3 Pros, 3 Cons (ADSK)

Autodesk (ADSK) — which is a top developer of computer-aided design software for engineers, manufacturers and media companies — certainly has not been popular with investors this year, with the stock price off 20%.

Should You Buy Autodesk Stock? 3 Pros, 3 ConsThe company has had to contend with a surging dollar, slowing global growth and a transition to the subscription business model. Unfortunately, as seen with the fiscal second-quarter report, it looks like these problems are not temporary.

ADSK forecasts current-quarter revenues of between $580 million to $600 million, and earnings at 5 cents to 10 cents per share. Yet the Street was looking for revenues of $628 million and profits of 24 cents per share.

As for the full-year, Autodesk is looking for revenues of $2.47 billion to $2.51 billion, and EPS of 60 cents to 72 cents. But again, this was another disappointment. The consensus was for $2.58 billion in revenues and $1.03 per share.

Despite all this, might there be a value opportunity with Autodesk stock? Well, to answer this question, let’s take a look at the pros and cons.

Autodesk Stock Pros

Diverse Global Platform: ADSK offers an array of software products that assist with design, simulations, real-world performance and analytics. With such functions, customers can build prototypes quicker and more efficiently, as well as allow for much more innovation. ADSK also has strong positions in various key markets. For example architecture, engineering and construction represent 35% of net revenues; platform solutions and emerging business accounts for 32%; manufacturing takes up about 27%; and media and entertainment accounts for about 6%. As a result, Autodesk has a relatively stable revenue base. What’s more, ADSK has an extensive global distribution footprint with about 2,200 resellers and distributors.

Emerging Growth Categories: CAD software has been mostly desktop focused because of the complexities and huge storage requirements. But ADSK has been investing heavily in mobile and cloud-based technologies. The result is Fusion 360, which is the world’s first cloud-based 3D CAD system. As noted in the recent earnings call, it looks like this offering is getting lots of traction. Another major opportunity for ADSK is the Internet of Things market, which for Autodesk involves the use of sensors and cloud-based systems to work from anywhere and collaborate at will. According to a recent study from IDC, the IoT market is expected to go from $655.8 billion in 2014 to $1.7 trillion in 2020. That’s a compound annual growth rate of 16.9%.

Financials and Valuation: In all, Autodesk has $1.4 billion in cash and generates substantial ongoing cash flows of about $163.7 million during the past six months. And ADSK’s valuation, at about 4.4 times sales, is reasonable. In comparison, Dassault Systemes (DASTY) has a multiple of 5.9 and Ansys (ANSS) is sitting high at an 8.6 multiple.

Autodesk Stock Cons

Move to Subscriptions: As noted above, ADSK is making a transition from traditional licensing to a subscription business model. While this is the smart thing to do — as shown by the success of cloud operators like (CRM) — it is not an easy process to navigate. After all, this was the case with other more established players like Adobe (ADBE). So for the short-run, ADSK is likely to see much more volatility in revenues and earnings because of the difficulties with gauging the adoption rates and contract lengths.

Competition: The main competitors include long-time operators like Adobe, Ansys and Dassault Systemes. But ADSK has definitely shown an ability to adapt. (Consider that the company has been around since the early 1980s.) But the technology industry can be topsy-turvy and there is a huge amount of venture capital sloshing around. In other words, the real threat for ADSK could be from fast-running startups that can leverage the cloud, mobile and IoT to make substantial gains in the market. According to the company’s 10-K:

“The industry is presently undergoing a platform shift from the personal computer to cloud and mobile computing. This shift further lowers barriers to entry and poses a disruptive challenge to established software companies.”

Macro Economy: The global economy is likely the most important factor for Autodesk stock right now. Unfortunately, the situation is looking dicey. For example, Moody’s has lowered the growth rate for the global gross domestic product for 2016 to 2.8%, down from the previous forecast of 3.1%. Some of the drivers include China’s economic slowdown, as well as Brazil and Russia’s negative growth. But ADSK still has a lot of exposure. About 70% of revenues come from international markets, and there is also substantial reliance, either directly or indirectly, on government spending; which may decline because of efforts to reduce budget deficits.

Bottom Line On Autodesk Stock

It’s true that there are serious challenges. ADSK must deal with the shifting landscape of technologies, like cloud computing, mobile and IoT. But there is also a slowing global economy to keep one eye on.

Then again, Wall Street has already been factoring this in with Autodesk stock, which is well off its highs. Besides, the long-term potential for the company is promising, as the Internet of Things opportunity is enormous on its own. But continued spending on construction across the globe is likely. A recent Investor Day Presentation from ADSK shows the volume of construction output is expected to grow by more than 70% to $15 trillion by 2015. Furthermore, the projection for global capital project and infrastructure spending is expected to go from $4 trillion in 2012 to $9 trillion by 2025.

So, should you buy Autodesk stock? Yes, the bad news seems to be factored in already, and the long-term potential for ADSK’s offerings is almost palpable.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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