Shares of architecture, engineering and construction (AEC) software giant Autodesk (NASDAQ:ADSK) have been red-hot for a long time now. Five years ago, this was a $50 stock. Today, ADSK stock trades up around $200, with major growth driven by a rapid uptake of Autodesk’s various software cloud subscription services across the AEC market.
The big rally in ADSK stock is far from done.
In 2020, Autodesk’s growth trends will remain robust as the company benefits from a rise in enterprise software spending trends globally. In 2019, enterprises stopped spending big on technology related investments amid rising geopolitical uncertainties. Now those uncertainties are fading. And as they do, 2020 corporate technology spending trends will materially improve, creating a rising tide to lift all enterprise software stocks.
Looking further out, the Autodesk growth narrative will remain vigorous for several years to come. The company has established dominance in the AEC vertical, and demand for software services in that vertical will only grow over time. At the same time, the company features an extremely attractive financial profile that includes subscription revenues with 90%-plus gross margins, leaving a ton of room for positive operating leverage and huge profit growth in the long run.
Net net, ADSK stock looks like a good investment both today and for the long haul.
2020 Could be a Good Year for Autodesk
Autodesk is positioned to have a big year for one simple reason — the company makes its money when enterprises spend on software, and enterprise software spending trends will improve over the next few quarters.
For all intents and purposes, Autodesk is an enterprise software company. Yes, some students and various other individuals buy AutoCAD and other subscriptions. But the bulk of its revenue comes from enterprises buying these subscriptions in bulk. From a customer perspective, we’re talking about construction companies, architecture firms, automakers and research facilities such as Jet Propulsion Laboratory, among various other customers.
Those companies curtailed their software tech spending in 2019. After rising 13.5% in 2018, enterprise software spending globally rose just 8.8% in 2019 amid rising geopolitical tension and increasing economic instability. Those trade tensions are now easing, and consequently, enterprise software spending trends are rebounding. According to Gartner, enterprise software spend is expected to rise nearly 11% in 2020.
This step up in enterprise software spend will provide revenue tailwinds for Autodesk, meaning that the company’s revenue growth trajectory should remain robust in 2020. At the same time, sustained low interest rates — central banks globally appear committed to maintaining easy monetary policy — should allow ADSK stock to sustain its rich valuation (nearly 70-times forward earnings).
Sustained big growth plus a premium valuation equals sustained big gains for Autodesk stock in 2020.
ADSK Stock Looks Good Long Term
Long term, Autodesk stock looks like a solid investment given its favorable fundamentals and financials.
At its core, Autodesk provides various cloud-based software tools to AEC companies. In many of the sub-verticals within the AEC industry, Autodesk’s tools are the dominant, from 2-D and 3-D modeling software AutoCAD to the building information modeling software Revit. In other verticals, such as construction administration software, Autodesk has some of the best solutions on the market.
Demand in the AEC software market is only going to go higher over time, as more and more AEC companies migrate to cloud-based software solutions. A lot of that demand will flow to Autodesk’s services. Consequently, the whole ADSK growth narrative should remain vigorous, defined by steady 15%-plus revenue growth for the next several years.
Meanwhile, Autodesk sells its services in subscription packages. That means most of the revenue is recurring and non-volatile. It also means that the revenue is very high margin (Autodesk runs at 90%-plus gross margins). Further, because Autodesk’s solutions are so good, they almost sell themselves, i.e. the company isn’t spending big to drive big revenue growth (operating expenses have been rising at a steady ~10% rate compared to 20%-plus revenue growth).
All of these favorable dynamics (big revenue growth, huge gross margins and relatively muted expense growth) should persist. As they do, Autodesk will sustain sizable profit growth. As go profits, so go stocks, and ADSK stock will be no exception.
Long term, then, Autodesk stock is only going higher.
Autodesk stock looks good in both the near and long term. Near term, ADSK stock will rally on rising enterprise software spending trends and sustained low interest rates. Long term, it will power higher behind sizable profit growth. When you find a stock that looks good both today and 5 years from today, that usually means it’s a good stock to buy.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.