Autodesk, Inc. (NASDAQ:ADSK) beat estimates on quarterly earnings and revenue. Recently, the company sustained several quarters of losses as it deferred revenue to move from a permanent license to a subscription revenue model.
Now, with most of the pain past the company, investors will have to decide if the short-term losses created a buying opportunity on ADSK stock.
ADSK Stock Beat on Revenue and Earnings
The company reported a loss for fourth-quarter 2017 of 9 cents per share. This number came in 2 cents per share ahead of consensus estimates. Revenue came in at $553.8 million, increase revenue bye 15.7% year-over-year. They also beat estimates by $9.06 million.
Like peers such as Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation (NASDAQ:ORCL), Adobe Systems Incorporated (NASDAQ:ADBE) and many other software companies, ADSK is transitioning to a subscription revenue model on its software. The new model has hurt the bottom line in the short term, and at times, ADSK stock.
Subscriptions cost less than the licenses, at first.
When the transition began in 2015, a license for AutoCAD Design Suite Ultimate sold for $6,295. That same software under the new model fell to an annual cost of $2,520. Earning that $6,295 had previously been instant. Under the new model, it took almost 2.5 years.
While ADSK will come out ahead in the end, waiting for subscription revenue to catch up has meant losses to the company.
Long-Term Thinking Has Paid Off for ADSK stock
Critics often accuse companies of not looking past the next quarterly report.
In this case, Autodesk’s management did the opposite and inflicted years of losses on the company to derive more revenue later. Fortunately, Autodesk stock investors have been patient with the company –mostly.
After its November earnings report, ADSK fell by nearly 13% on news that the company was reorganizing to prioritize subscription plans.
Still, for most of the last two years, the stock price went up. Despite sustaining heavy losses in both 2016 and 2017, the stock nearly tripled in value between early 2016 and late 2017. Its previous record high of about $131 came just before the company’s last earnings report.
Following this report, investors bid up the price of ADSK stock the day after the company revised its guidance downward.
The company believes it will bring in $550-$560 million in the next quarter. Consensus revenue had stood at $585.06 million. The company also expects to return to profitability with earnings of between 1 cents and 4 cents per share. Analysts had expected 16 cents per share.
Having understanding investors helps current stockholders.
Unfortunately for investors who want in, this transition did not create a buying opportunity. Forward estimates place the price-to-earnings (PE) ratio for the upcoming fiscal year at 166. For fiscal 2021, analyst forecast a profit of $3.96 per share. With that figure, the stock trades at over 30 times 2021 earnings.
The bottom line on ADSK stock
Although management succeeded in increasing long-term revenue by switching to a subscription revenue model, the multiple quarters of losses did not create a buying opportunity.
Investors understood the method to management’s madness. They tripled the price of Autodesk stock over the last two years as the company reported losses quarter after quarter. Now, with the company able to enjoy the increased revenue, profit growth is on track for two years of annual profit growth over 100%.
Unfortunately, ADSK stock now supports a valuation at least two years ahead of the price. With the popularity of its software remaining strong the company’s future is likely secure. Still, new investors will likely profit more from other investments at this time.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.