Since the latest earnings report from Autodesk, Inc. (NASDAQ:ADSK), the shares have been on a nice bull ride. Consider that the stock has gone from $120 to $136.
OK, then, so what now? Can we expect more good ADSK news? Or is it better to avoid the shares?
Well, it’s true that the performance for the company has been choppy. For example, in the third quarter, which ended in late November, Autodesk stock got hit hard. The company’s outlook was fairly soft and the user growth fell below expectations. There was also an announcement of a 13% cut in the workforce.
But consider that Autodesk is in the midst of a major transition, going from a traditional software model to cloud-based subscriptions. And yes, this means there will be some hiccups along the way.
Yet when it comes to the long-term, Autodesk stock does look attractive. So let’s take a look at some of the key drivers:
Autodesk Stock Advantage No. 1: Solid Barriers To Entry
When it comes to the CAD (Computer Aided Design) market, Autodesk is a leading brand. It certainly helps that the company has been around since the early 1980s and has been focused on pushing innovation. A key part of this has been savvy acquisitions, such as for Delcam, Socialcam, Eagle Software and CadSoft Computer.
But there are other advantages. Keep in mind that CAD software is sticky — as it is often used on a daily basis — and has expensive switching costs. Note that many companies use the technology across a network of users and there is a need for considerable training.
Autodesk also has significant global scale. There are over 200 million users, which include engineers, architects and designers.
Autodesk Stock Advantage No. 2: The Cloud
Perhaps the most important catalyst for ADSK stock is the aggressive push to the cloud. This technology has many benefits, such as allowing for seamless upgrades, centralized data and personalization. What’s more, there are recurring revenues.
And of course, Wall Street loves the cloud . Old-line tech operators like Microsoft Corporation (NASDAQ:MSFT) and Adobe Systems Incorporated (NASDAQ:ADBE) have seen strong gains because of their own transitions.
As for ADSK, the company has been ahead of the curve in the CAD business (the process began in 2015), with offerings like BIM 360, Revit, Inventor and Fusion 360. These products include features like mobile access, collaboration, 3D rendering and advanced visualizations.
The latest financial results show the success of the efforts. In the fourth quarter, subscription plan annual recurring revenues soared by 106% to $1.18 billion and total subscriptions increased by 127,000 to 3.72 million.
Autodesk Stock Advantage No. 3: Expanding Market Opportunity
Autodesk is in the process of cutting costs and unloading non-core businesses. But the goal is not just to boost profits. Rather, the company sees lots of potential to pursue growth. In other words, the streaming should help provide the resources to pursue these opportunities.
The strategy — which should help propel Autodesk stock — includes two main areas of focus:
Manufacturing: The addressable market is about $13 billion and there are various important drivers, including the emergence of new materials, supplier collaboration and digital manufacturing/3D printing. To this end, Autodesk has been working on features like simulation, 3D rendering and product lifecycle management (PLM).
Construction: The estimated market size is $10 billion. No doubt, there continues to be strong growth in Asia. But then again, with the aging infrastructure in Europe and the U.S., there is likely to be renewed construction spending in these areas.
All in all, there is more than enough runway for growth at Autodesk. And more importantly, the company has the resources, talent and product line to get an outsized portion of the opportunity.
Tom Taulli is the author of High-Profit IPO Strategies, All 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.