Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.
It may be old-fashioned, but when I think of economic growth, I think of building.
It appears some sort of boost to infrastructure spending will likely come out of negotiations between President Biden and Congress. Our country certainly needs it. The latest report card on U.S. infrastructure from the American Society of Civil Engineers (ASCE) rated our country’s infrastructure a C-. There’s a lot of work to be done and good companies that can help.
One company looks to be perfectly positioned to benefit from any increase in infrastructure spending here in the United States.
Autodesk
The company I want to bring to your attention today is Autodesk (ADSK). In its own words, the company “makes software for people who make things.”
Autodesk’s clients work mostly in the architecture, engineering, and construction industries (AEC), although the manufacturing, media, and entertainment industries also use its software. The company’s cloud-based products are built to streamline design, building, and data management processes. In fact, many universities with architecture and engineering programs teach their students how to use Autodesk‘s products in their work.
Despite its market-leading position in digital design, and its ability to reinvest capital at high rates of return (return on capital in its latest fiscal year was 24.5%), Autodesk is disliked by Wall Street for digitizing construction and architecture industries.
The reason for that is twofold: Autodesk has a lot of non-paying customers, and it was slow to move to the software-as-a-service (SaaS) model that is now commonplace in the software industry.
How Autodesk Is Overcoming Its Deficiencies
However, the company’s management is overcoming these deficiencies.
Autodesk was slow off the mark in moving to the SaaS model. It only stopped the sale of permanent commercial licenses in the company’s 2016 financial year, and its transitional maintenance-to-subscription strategy began just three years ago. Compare that with Adobe (ADBE), which pioneered the model back in 2013.
Now, Autodesk is moving in the right direction. In its fiscal year ending in January 2021, recurring revenues accounted for 97% of Autodesk’s net total. More than a quarter of that came from subscriptions. Also, revenue yet to be recognized under existing contracts increased by more than a fifth, to $4.2 billion.
The subscription plan was one missing link in Autodesk’s software business model. The company is already highly cash-generative and it boasts a high gross margin, which has averaged 90% over the past three years.
But what about all those non-paying users of its software?
Autodesk is making progress on that front as well. The company says it has 12 million non-paying users, despite the widening quality gap between the paid version and the pirated version as Autodesk updates its offerings.
The news is that these 12 million non-paying users represent a huge pool of possible customers who do have a need for Autodesk software.
While there are no specifics as to Autodesk’s exact strategy on converting the pirates to paying users, CEO Andrew Anagnost said in a recent analyst call that first-quarter revenue from converting previously non-paying users had almost doubled year over year.
What the Future Holds
Autodesk management is trying to make some very smart acquisitions to make its product line-up even stronger. In early June, the company launched a $3.9 billion bid for Altium (ALMFF), an Australian software company that helps engineers design printed circuit boards. Altium’s board quickly turned down the offer; however, if Autodesk is willing to bump up its bid—which is likely—a takeover could still happen.
In a successful deal, a few months ago, Autodesk acquired Innovyze, a software analytics company for the water utility and management industry, for $1 billion. And it bought the product lifecycle management start-up Upchain for an undisclosed amount.
Both purchases will increase the company’s exposure to the infrastructure market. Innovyze, in particular, could be a big beneficiary of the aforementioned multi-trillion-dollar infrastructure bill. The proposed spending plan includes $111 billion in investment in water infrastructure.
Even without these deals, Autodesk’s core AEC and manufacturing markets are growing well as the global economic recovery from the pandemic begins.
I always like a company whose business has geographic diversity, and Autodesk certainly is in this category. In May, the company noted that usage of its software was above pre-pandemic levels in most of the Asia Pacific and Continental Europe regions. While the U.S. and the U.K. still lag, a rebound in construction activity in both countries bodes well for the year ahead.
If you’re an investor worried about inflation, there are no worries on that front with Autodesk. Companies with pricing power do well in an inflationary environment. Autodesk does have pricing power and raises its price every year roughly in line with inflation.
The company’s improving business model, high margins, and ongoing use of newer technologies like artificial intelligence (AI) in the construction and manufacturing industries holds lots of promise for its long-term prospects.
That makes Autodesk a 5-star stock. It can be bought at any price up to $320 a share. You can buy fractional shares through any major brokerage firm.
— Tony Daltorio
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Source: Growth Stock Advisor