Key Insights
- Autodesk's estimated fair value is US$233 based on 2 Stage Free Cash Flow to Equity
- With US$258 share price, Autodesk appears to be trading close to its estimated fair value
- The US$287 analyst price target for ADSK is 23% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Autodesk, Inc. (NASDAQ:ADSK) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Autodesk
Is Autodesk Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$1.48b | US$2.04b | US$2.15b | US$2.24b | US$2.32b | US$2.40b | US$2.47b | US$2.54b | US$2.61b | US$2.68b |
Growth Rate Estimate Source | Analyst x13 | Analyst x13 | Analyst x5 | Est @ 4.10% | Est @ 3.62% | Est @ 3.28% | Est @ 3.05% | Est @ 2.88% | Est @ 2.77% | Est @ 2.69% |
Present Value ($, Millions) Discounted @ 6.7% | US$1.4k | US$1.8k | US$1.8k | US$1.7k | US$1.7k | US$1.6k | US$1.6k | US$1.5k | US$1.5k | US$1.4k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$16b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$2.7b× (1 + 2.5%) ÷ (6.7%– 2.5%) = US$66b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$66b÷ ( 1 + 6.7%)10= US$34b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$50b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$258, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Autodesk as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.7%, which is based on a levered beta of 1.020. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Autodesk
- Earnings growth over the past year exceeded its 5-year average.
- Debt is not viewed as a risk.
- Earnings growth over the past year underperformed the Software industry.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the American market.
- Revenue is forecast to grow slower than 20% per year.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Autodesk, we've compiled three fundamental factors you should assess:
- Risks: To that end, you should be aware of the 1 warning sign we've spotted with Autodesk .
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for ADSK's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NasdaqGS:ADSK
Autodesk
Provides 3D design, engineering, and entertainment technology solutions worldwide.
Solid track record with reasonable growth potential.