Cloud Workflow Friction And AI Monetization Delays Will Eventually Support Stronger Fundamentals

Catalysts

About Autodesk

Autodesk provides software platforms that connect design and make workflows for architecture, engineering, construction, manufacturing and related industries.

What are the underlying business or industry changes driving this perspective?

• Although demand for cloud based convergence of design and construction workflows in AECO is helping Autodesk Construction Cloud win migrations such as the 700 project move from a competitor, the company still has only partial penetration of projects at existing customers. As a result, revenue growth from this area relies on steady expansion that could slow if customers standardize more cautiously, which would temper top line growth.
• While mid market manufacturers are starting to adopt Fusion as a unified design and make platform, many of these customers are coming from spreadsheets and basic data management. The ramp from small 2 to 3 user deployments to larger rollouts could therefore prove slower and more uneven than hoped, limiting the contribution to revenue and delaying any positive impact on operating margins.
• Although AI features such as Sketch AutoConstrain in Fusion show high user acceptance and clear time savings, Autodesk is still in the early stages of moving from task level productivity tools to monetizable workflow and systems automations. As a result, the timing and scale of any incremental AI related revenue or margin uplift remain uncertain.
• While customers across AECO and manufacturing are investing in digital workflows to address structural capacity constraints and prepare for more machine based execution, Autodesk’s plan to monetize increased consumption and API usage means a portion of that opportunity depends on customers accepting new usage based charging. This could cap upside to billings and earnings if larger users push back on incremental costs.
• Although the shift to cloud platforms and industry clouds should support longer term demand for connected data environments, the company’s own comments about macro uncertainty, ongoing sales and marketing optimization and remaining friction from the new transaction model point to a risk that any slowdown in large renewals or EBA expansions would weigh on revenue growth and keep net margins below internal long term targets.

Assumptions

This narrative explores a more pessimistic perspective on Autodesk compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Autodesk's revenue will grow by 12.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.1% today to 24.4% in 3 years time.
• The bearish analysts expect earnings to reach $2.4 billion (and earnings per share of $11.49) by about February 2029, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.1x on those 2029 earnings, down from 41.6x today. This future PE is greater than the current PE for the US Software industry at 24.3x.
• The bearish analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Autodesk highlights that tailwinds from the new transaction model and the transition to annual billings are skewing current billings and free cash flow. These effects are expected to diminish next year, which could leave revenue and free cash flow growth looking less robust once those temporary boosts roll off and weigh on the share price if expectations are not adjusted.
• Management repeatedly flags elevated macro uncertainty and the need to build risk into guidance, along with a heavy concentration of enterprise business agreement and large subscription renewals in January. Any slowdown in customer spending or weaker renewal behavior could affect revenue and operating margins at the same time.
• The new transaction model and ongoing sales and marketing optimization are still being worked through, with management acknowledging remaining friction and potential disruption next year. This could limit channel productivity, slow new business generation and put pressure on billings growth and earnings.
• Autodesk is investing heavily in cloud platforms, AI and consumption based models, but monetization is described as a multiyear journey. Early AI features are focused on task level productivity and some usage based charging could face pushback from heavy API users, which could mean slower than hoped contributions to revenue growth and net margins.
• Long term margin ambitions rely on further go to market efficiency and operating leverage, yet management also expects incremental headwinds to reported operating margins from the new transaction model in fiscal 2027. Cloud and AI workloads are expected to pressure gross margin, which could limit earnings growth if cost discipline or pricing power do not fully offset these pressures.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Autodesk is $262.2, which represents up to two standard deviations below the consensus price target of $346.53. This valuation is based on what can be assumed as the expectations of Autodesk's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $460.0, and the most bearish reporting a price target of just $250.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $9.9 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $218.64, the analyst price target of $262.2 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.