Autodesk, Inc. (NASDAQ:ADSK) is known for its computer aided design (CAD) software, which has been the industry standard of engineers for years. Although the company has very strong fundamentals, a market-leading position, and nice growth projections, the high valuation of the stock (over 20 times earnings) struck me as a bit too high, so I decided to investigate a little. With shares just under their 52-week high, what is the best course of action ahead of the company’s earnings report on Thursday, May 16?
About Autodesk
Autodesk, Inc. (NASDAQ:ADSK) sells its products all over the world, both through retailers and directly to consumers, although sales through retailers make up the bulk (85%) of the company’s revenues. The company is truly a worldwide enterprise, with 36% of revenues coming from North and South America, 38% from Europe, the Middle East, and Africa, and 28% from Asia.
The company’s recent growth efforts have been in the form of a transition to cloud-based and mobile-based software products, and incorporating simulation and visualization into its products as computers become more powerful. Cloud-based products also reduce the potential for piracy, which has historically been one of the biggest problems with software companies. The company is also actively growing its international sales, particularly in emerging markets, where a large portion of future growth is expected to come from.
Valuation
At around 20.5 times last year’s earnings, Autodesk, Inc. (NASDAQ:ADSK) may sound a bit expensive, especially for such an established and somewhat mature company. First of all, the 13.6% annual forward earnings growth rate that is projected by the consensus of analysts covering the company sounds pretty good. Second, when taking into account the $1.2 billion in net cash (cash minus debt) that is on Autodesk’s balance sheet, the valuation doesn’t look quite so expensive. Backing out the cash, shares trade for 17.7 times earnings, which looks a little more palatable, especially considering the forward growth rate.
Alternatives
To get an idea of whether or not Autodesk, Inc. (NASDAQ:ADSK) is truly a good deal, we need to examine some of the alternatives. First I’d like to take a look at ANSYS, Inc. (NASDAQ:ANSS), which is one of the leaders in simulation software. ANSYS’s products are used primarily for “virtual prototyping;” that is, their software allows companies to see how their products will behave in the real world before they even build them. Unlike Autodesk, most of ANSYS, Inc. (NASDAQ:ANSS)’s business comes in the form of direct sales. ANSYS trades for a pretty lofty P/E of 25.8 times TTM earnings, with a similar projected forward growth rate as Autodesk. With $577 million in net cash on the balance sheet, ANSYS is definitely a solid company, just not as appealing as Autodesk.
Synopsys, Inc. (NASDAQ:SNPS) is another developer of design software, specializing in electronic design automation (EDA) software, which is used in the design of complex integrated circuits. So, needless to say, this is a much more specialized company with an exclusive focus on the semiconductor industry, and as such carries the added risk of being undiversified. Although the consensus calls for forward earnings growth of just about 9% annually going forward, the stock trades at a reasonable valuation of 17 times earnings, and excluding cash, the P/E is just 14.9. Not too bad, but the narrow customer base gives me hesitation here.
Buy, Sell, or Hold?
I like Autodesk, Inc. (NASDAQ:ADSK) and I think it is fairly valued right where it is. However, with the approximately 30% upward move in the past 6 months or so, I would wait until after the earnings announcement coming up soon to see if we may get a pullback that would create a better entry point.
The article The Best In Design Software For Your Tech Portfolio originally appeared on Fool.com and is written by Matthew Frankel.
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