Investors in an engineering-design software company Autodesk (NASDAQ: ADSK) was hit when it released its disappointing third quarter fiscal 2022 earnings report. The question now is whether this is a buying opportunity or a worst-case warning. to come. Let’s see what happens and what investors can expect next.
What happened with Autodesk this year
Please note that Autodesk has just completed its third fiscal quarter of 2022. This is a critical point as management has focused on the mast forecasting $ 2.4 billion in free cash flow (FCF) as of today. during fiscal year 2023. Of course, when management expects goals, investors expect them to meet them and begin to evaluate assumptions accordingly.
The problem with Autodesk’s 2023 guidance is that it has always seemed aggressive. For example, the company started the year with leadership aiming to reach an FCF of $ 1.575 billion to $ 1.65 billion in fiscal 2022, reaching the aforementioned $ 2.4 billion in fiscal year 2022. of fiscal year 2023. That’s fair enough but looks aggressive given that the FCF is expected to increase by $ 750 million to $ 825. million to reach the 2022 target.
However, the target for FY2023 seemed even more elusive after management lowered its forecast for FCF for FY2022 to $ 1.5 billion to $ 1.575 billion in August when it presented the second quarter results. This was followed by a further reduction from $ 1.42 billion to $ 1.46 billion in the recent earnings report.
During the third quarter earnings call, CFO Debbie Clifford said management continues to “target $ 2.4 billion free cash flow in fiscal year 23 in constant currency because we believe that the current macroeconomic headwinds that we are seeing are transitory. ” However, she also noted that “if the deceleration in growth and the strengthening of the dollar continues until next year, we could see a potential risk to this target of around $ 100-200 million based on of what we know today “.
On top of all this, investors were somewhat disappointed in September when management told the market that the FCF would decline in fiscal 2024 following the decision to revise its billing strategy. In summary, Autodesk will offer fewer upfront discounts for multi-year offerings in favor of annual payments with fewer discounts, a move that will lead to increased revenue from 2024.
What’s wrong ?
Digging into the details of the third quarter, Clifford admitted that the billings “were not up to our expectations.” CEO Andrew Anagnost blamed it on the impacts of supply chain disruptions and inflationary pressures on Autodesk customers, combined with a global labor shortage and unfavorable exchange rate fluctuations. The inadequacy of billings compared to expectations forced management to reduce its forecasts for fiscal year 2022 and alert the market to the risks surrounding the 2023 objectives.
Frankly, this is the last thing investors wanted to hear, given the ongoing debate around its 2023 FCF target and the fact that the 2024 FCF fiscal year is likely to decline. This creates a level of uncertainty around which, rightly or wrongly, the market doesn’t like.
A buying opportunity
That said, Autodesk is certainly not the only company to have seen their short-term expectations drop due to supply chain issues and commodity inflation. Additionally, if any of these issues turn out to be temporary, Autodesk could regain the business that management previously expected.
Additionally, Clifford discussed the $ 100-200 million risk for the 2023 fiscal target. The worst-case use involves FCF’s $ 2.2 billion in 2023. This would place the stock at a multiple price. / FCF of 25.6 times FCF in 2023. That’s a decent multiple for a stock growing in income at a mid-teens rate with expanding operating margin, to boot.
On the other hand, investor confidence will have been negatively affected by this year’s developments. Keep in mind that the growth of the FCF will be under pressure in fiscal 2024 due to the conscious decision to change the billing strategy.
All in all, Autodesk is a more attractive investment now that management has alerted the market to the risk around its 2023 target and the price has come down. As such, speculative investors will have an incentive to get their feet wet, while more risk-averse investors will want to see a quarter or two of management maintain FCF guidance before jumping in.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.