Autodesk Sees Earlier Demand for Annual Contracts, Affecting Billings; Shares Undervalued

Wide-moat Autodesk reported third-quarter financial results that didn’t surprise, coming right in line with our expectations all around. However, Autodesk experienced a slowdown of business in Europe and currency fluctuations, which had Autodesk missing revenue slightly on an as-reported basis. In terms of visibility, Autodesk’s customers are seeing pressure within some segments, but still seeing a fairly healthy book of business over the next 12-18 months, which gives us confidence that Autodesk’s near-term future is sound, along with unchanged midterm operating margin expectations. Nonetheless, the market reacted to the result negatively, falling by 9% after hours to $191 per share, which we believe is a result of lower billings guidance. However, the change of billings outlook is a factor of less demand for multiyear contracts ahead of Autodesk’s more aggressive push to transition to annual contracts next year. We do not see the premature annual contract demand as concerning. As a result, we are maintaining our $230 fair value estimate, leaving Autodesk shares undervalued, in our view, which we think represents a rare buying opportunity for this high-quality stock.