Software company Autodesk stunned Wall Street today as it plummeted to $214.25, marking a -3.2% change compared to the S&P 500 and the Nasdaq indices, which logged -0.0% and -0.0% respectively. ADSK is -6.79% below its average analyst target price of $229.86, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Autodesk shares have outperformed the S&P 500 by 12.0%, with a price change of 32.0%.
Autodesk, Inc. provides 3D design, engineering, and entertainment technology solutions worldwide. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Autodesk's trailing 12 month P/E ratio is 55.4, based on its trailing EPS of $3.87. The company has a forward P/E ratio of 25.6 according to its forward EPS of $8.37 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
ADSK’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Autodesk, we obtain a PEG ratio of 2.12, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Autodesk's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 5,005,000 | 3,536,000 | 19.76 | 40.34 |
| 2022-01-31 | 4,386,400 | 3,350,300 | 14.08 | -15.18 |
| 2021-01-31 | 3,790,400 | 2,824,200 | 16.6 | 58.25 |
| 2020-01-31 | 3,274,300 | 2,605,900 | 10.49 | n/a |
- Average operating margins: 15.2%
- Average operating margins growth rate: 17.2%
- Coefficient of variability (lower numbers indicate less volatility): 25.8%
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Autodesk's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-01-31 | 2,071,000 | -46,000 | 2,025,000 | 38.24 |
| 2022-01-31 | 1,531,300 | -66,500 | 1,464,800 | 9.21 |
| 2021-01-31 | 1,437,200 | -95,900 | 1,341,300 | -1.51 |
| 2020-01-31 | 1,415,100 | -53,200 | 1,361,900 | n/a |
- Average free cash flow: $1.55 Billion
- Average free cash flow growth rate: 10.4%
- Coefficient of variability (the lower the better): 20.8%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, ADSK is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Autodesk's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 51, so it's likely that equity investors are over-valuing the company's assets.
As of first quarter of 2023, Autodesk is likely fairly valued because it has an inflated P/E ratio, an elevated P/B ratio, and consistent free cash flow with an upwards trend. The stock has mixed growth prospects because of its weak operating margings with a positive growth rate, and an inflated PEG ratio. We hope this analysis will inspire you to do your own research into ADSK's fundamental values -- especially their trends over time.
