Autodesk (NASDAQ:ADSK) stock is on a roll after climbing 23% in the last month, pushing it to more than $240 per share. That comes as a surprise since the software giant is heavily exposed to the manufacturing and construction industries that have come under the hammer due to the novel coronavirus.
We’ve seen that economies are slowly getting back to normal after the ravaging effects of Covid-19. However, they are still a long way from recovering to pre-pandemic levels.
Considering the gains the stock has made recently, I believe the company’s shares offer limited upside at the moment. The long-term story is still good, but investors should wait for shares to cool down before increasing their stakes in the company.
Earnings Indicate the Recovery Will Be Slow
The recently concluded quarter was a good one for the software corporation, despite the Covid-19 situation. Revenues increased by 20% to reach $886 million, beating analyst estimates by $17.81 million. Adjusted EPS beat estimates by 6 cents to come in at 85 cents per share. Despite these healthy numbers, management issued somber guidance for the rest of the year.
Revenues were always going to take a hit, considering the nature of Autodesk’s client base. In a conference call with analysts, CFO Scott Herren said, “We expect the second quarter’s new business activity to be the most impacted by the pandemic.”
Head in the Cloud
Autodesk is still working hard to convert its license-based fee structure to one that is more subscription-oriented. The process makes it easier for customers to renew licenses, but also increases the churn rate.
In an environment where revenues are evaporating, a subscription-based system may lead to a lower number of renewals. However, there is little the company can do here, since adopting software as a service (SaaS) is pretty much a given for tech companies at this stage.
On a brighter note, the company’s transition to a cloud-based system will pay dividends. The pandemic has led to several companies adopting the work from home model.
What’s more important is that major companies like Mondelez (NASDAQ:MDLZ) and Barclays (LON:BARC), among others, are already talking about a permanent shift to work from home and reduced office space. That means Autodesk’s shift to a cloud-based system could not have come at a better time.
Is ADSK Stock Realistically Valued?
Autodesk is the preeminent computer-aided design software in its space. There’s no doubt the platform is a must-have for several architecture firms and engineering businesses.
However, Autodesk’s path to recovery in the current climate is more complex than its peers. That’s why its bull run seems confusing. It feels like investors have already priced in the recovery before it has happened. ADSK stock trades at a price-to-earnings ratio of 173.59 times, a premium of 420.51% to the overall sector. It is far and above the highest P/E ratio in its peer group.
Analysts expect the stock to become affordable by the next year, so that could be a better time to buy into the stock. Still, it will remain highly coveted by investors for the foreseeable future.
Final Word on ADSK Stock
Autodesk is the software of choice for manufacturing and engineering companies. Designing, modeling, and rendering will continue to evolve, and Autodesk will be at the forefront of this evolution.
In the long run, the company has a lot to look forward to, as increased work from home practices become the norm rather than an exception. Hence, demand for its services will only grow with time. That’s why the stock will always be richly valued and coveted by savvy investors.
However, shares of the tech giant are trading at extremely high multiples at the moment if you want to increase your stakes in this business or open a position, its best to wait it out.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.