Pay Attention to the Records at Autodesk

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As the Autodesk (NASDAQ: ADSK) stock has struggled over the last few years, investors should pay more attention to the record numbers than disappointing top line growth.  

The leading design software firm is facing issues previously encountered by other software firms including Adobe Systems (NASDAQ: ADBE) and Intuit (NASDAQ: INTU). The shift to cloud based services and term licenses is requiring the companies to record revenues over an extended period instead of immediately as previously done with perpetual licenses. Most of these deals involve the company collecting cash upfront while deferring the revenue recognition over one to two years.

Record results

While Autodesk reported declining revenue and earnings for Q1 2014, the company actually had record deferred revenue and cash flow, two numbers that are significant signals of long-term stock gains.

  • Cash flow from operation activities came in at $224 million, compared to $139 million in the first quarter of fiscal 2013.
  • Deferred revenue increased 17% to $851 million, compared to the first quarter of fiscal 2013.

So while revenue declined by 3% to $580 million an astonishing 39% of revenue made it to positive cash flow. The deferred revenue growth will lead to a strong 2014 story for the stock as earnings will be weak during Q2 and around flat for Q3 and the whole year. The stock is likely to flounder until estimated fiscal year 2015 (ending in January) earnings bottom out and start rebounding.

Future beneficiary of 3D printing

The company is active in the 3D design tools market with numerous tools and apps available at 123Dapp. Autodesk also recently bought Tinkercad to take advantage of those web-based 3D design tools.

Currently the app site features a special discount for a MakerBot 3D printer. That 3D printer maker was recently purchased by Stratasys, a leader in the 3D printer market. A connection with Stratasys and MakerBot could provide an inside track for advanced software design tools for 3D printing.

Potential

When first reviewing the $7.6 billion market value of the Autodesk stock, the impression can be that the stock has potentially peaked. After reviewing the similar software based firms in other sectors, one gets the impression that the value could actually soar higher. Intuit is worth $18 billion and Adobe Systems has a value topping $22 billion. In both cases, the stocks have revenue multiples in excess of Autodesk. So not only do those stocks generate higher revenue volumes, but the market as well assigns bigger valuations to those units of revenue. Part of that reason is that Adobe and Intuit have been more successful convincing investors of a great future that possibly Autodesk has been lacking.

As the three-year chart below shows, the software stocks generally traded in tandem during that time period until the last few months. The weakness in Autodesk compared to the group might provide an investing opportunity

<img alt="" src="http://media.ycharts.com/charts/e20e03987d0d25292c7313c86b15d8f6.png" />

ADSK Total Return Price data by YCharts

Bottom line

The advancement of 3D printing software tools by Autodesk could be the technology that grabs the attention of investors in order for the stock to obtain a similar valuation multiple as Adobe or Intuit. The three companies don’t compete for customers, but all three software makers face the same pressures on the moves away from perpetual licenses and towards cloud-based solutions with subscriptions. The short-term impacts to the financials can be disruptive, but investors should pay attention to the record numbers at Autodesk. Deferred revenue and cash flow are typically good indicators of solid future results.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Adobe Systems and Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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