Autodesk Investors: Paying a V8 Price for a 4 Cylinder Engine

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I’m beginning to wonder if CAD software company Autodesk (NASDAQ: ADSK) will ever truly grow to the extent that its valuations presumes - although a P/E ratio of 31 is not that all uncommon for tech companies. But at some point, expectations have to be matched with execution.

Don’t get me wrong, I think Autodesk is a great company. But on the other hand, there are a lot of so-called “great companies” that produce very little in terms of equity value. However, for Autodesk, it seems that with consecutive quarters of uninspiring growth it just might be time for investors to start looking elsewhere – or so I thought.

The Company is Parked in Neutral

It’s hard to not like a company that is growing its bottom line. But as we have seen with other tech giants such as Amazon (NASDAQ: AMZN) and Salesforce.com (NYSE: CRM) carry enormous valuation multiples, investors are always willing to sacrifice near term profits for chance at a big pay day.

However, both Salesforce.com and Amazon are producing top line growth of 30%. In Amazon’s third quarter, the company did what everyone expected it to do. Sales soared 27% to $13.81 billion -- beating its own estimates of $12.89 billion. Remarkably, over the past five quarters the company has increased revenues by an average of 34%.

Likewise, Salesforce.com's third quarter arrived in impressive fashion. The company earned $0.33 per share on revenues of $788 million, which represented year-over-year growth of 35%. Not only did the company beat on both its top and bottom lines, but it continues to show no meaningful signs of slowing down as subscription and support business revenues soured by 35% year-over-year.

For Autodesk, the situation is different. The company has shown no mobility and has been parked in neutral with no growth drivers. Its fiscal Q3 report missed analysts’ revenue estimates, which fell to $548 million.

But on the other hand, the company managed to squeeze out enough profits to beat bottom line estimates with net income arriving at $0.47 per share excluding costs. Likewise, it seems that Autodesk continues to maintain its margins despite significant macro headwinds. So the company deserves some credit, since after all, business is about profits.

Where are the Growth Drivers?

However, it’s worth wondering how long a stock that trades at a premium can avert poor sentiment surrounding revenue growth. Margins and free cash can only excite investors for so long. But those concerns were for another time since investors (nonetheless) applauded these results, sending shares up 2%.

But why? It’s not as if things are going to get better. In fact, management has guided both Q4 profits and revenues (top range) to come in below analysts’ estimates. It seems the bear argument continues to fall on deaf ears, and investors have other ideas. Since the report and despite the dismal outlook, the stock is up close to 10%.

I don’t see the reason for all of the optimism. While I’m willing to consider that the company’s growth struggles are broadly the result of a poor economic climate, I just don’t think that paying premium pricing for the stock is a prudent play.

Bottom Line

The good news for Autodesk is that the company’s fundamentals are strong, and there is very little risk to the downside. Although the stock is 30% below its 52-week high of $42, shares remain expensive on a relative basis.

The counter-point to this argument is that it presents value. Perhaps that's true, but for the stock to work long term, Autodesk will need to show that it can produce top line growth to the extent that its current valuation presumes. Otherwise, it might be time for expectations to change.


rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Salesforce.com. Motley Fool newsletter services recommend Amazon.com and Salesforce.com. 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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