Autodesk currently trades at $246.30 per share and has shown little upside over the past six months, posting a small loss of 2.6%. The stock also fell short of the S&P 500’s 7.1% gain during that period.
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Why Is Autodesk Not Exciting?
We’re passing on Autodesk for now. Here are three reasons why ADSK doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Autodesk grew its sales at a 14% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Autodesk’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Autodesk’s operating margin rose by 4.8 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 25.1%.
Final Judgment
Autodesk isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 6× forward price-to-sales (or $246.30 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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