Description

I. Setup & Sentiment

Autodesk has been shrouded in negative sentiment as the name has traded flat in the past year and has significantly underperformed compared to tech and software benchmarks. Fwd. EBITDA multiples have compressed over 50% in the past two years as the Street focuses on the worsening macro backdrop, believing that “ongoing macro uncertainty currently overshadows company-specific drivers.” This hyperfixation is misguided due to the cyclical nature of Autodesk’s end markets and the resilience of the product to macro downturns. The resulting compressed multiple provides a compelling entry price into a long-term compounder with defensible and durable earnings growth. ADSK presents an excellent risk/reward profile due to a combination of cloudy financials from elongated business model transitions, as well as a myriad of medium-term growth levers powered by ADSK’s monopolistic economics and an impending inflection point in nascent markets, which will drive the stock to double in next 3 years.

Procore Read-Through

We note that Autodesk’s closest construction competitor, Procore (PCOR) announced Q3 earnings on November 1, 2023. PCOR beat estimates; however, the company lowered FY24 guidance and cRPOs decelerated 6% sequentially, with management citing FY24 macro as more challenging than expected. The stock was down ~18% within a day, entirely on forward macro missing expectations. ADSK hardly moved – the stock is slightly up since Procore’s earnings. We believe this reaction is another proof point supporting the claim that the challenging macro is baked into the stock price. Since Autodesk’s core business of Architecture / Engineering is a leading indicator of the construction industry, the stock has already been trading around the current 20x NTM for the past year. 

II. Company Overview

Autodesk (ADSK) is the dominant provider of architecture design software, with competitive offerings in the construction, manufacturing, and media and entertainment verticals. The company has five reporting segments: Architecture, Engineering, and Construction (AEC); AutoCAD and AutoCAD LT; Manufacturing (MFG); Media and Entertainment (M&E), and Other. AEC’s core products include Civil 3D, AEC Collection, Revit LT, and BIM Collaborate Pro; AutoCad’s core products include AutoCAD, AutoCAD LT, and AutoCAD Revit LT; MFG’s core products include Fusion 360, Product Design & Manufacturing Collection, and Navisworks; M&E’s core products include Maya, 3ds Max, Media & Entertainment Collection, and Shotgrid. 

ADSK has established itself as best-in-class across industry groups over the past three decades, positioning itself to take on more share in the coming years. They have become dominant in engineering and architecture software. In cases like AutoCAD, Autodesk has become the industry’s de facto platform, similar to how designers use Adobe to format pdfs. 

III. Key Dynamic: Monopoly Economics

Monopolistic economics are the key to best-in-class companies turning into long-term compounders with significant downside protection. Autodesk dominates its core market, Architecture & Engineering, and will continue to do so with strong endurance on its earnings power in the future providing a compelling risk/reward for the stock.

Autodesk is a best-in-class company with monopoly economics. In its core architecture and engineering segment (~70% by revenue), Autodesk dominates with ~70% of share. We believe that near-term headwinds are obscuring the attractive long-term setup. The Street is focused on the difficult “ongoing macro” and “business platform transitions” that have led to disappointing earnings and guidance in FY24. The stock is still down 15% YoY since the first indications of slowing macro, and continues to trade at the historical low of ~20x NTM EBITDA. We believe this sentiment ignores the fundamental monopoly economics of the business, and we look-through FY ’26/’27 earnings remain strong despite temporary challenges.

Competitive Advantages

In steady-state, we believe Autodesk can sustainably grow volume 2% per year in-line with end market TAM growth, although Autodesk is still taking share in the near-term. Its only international competitor, Nemetschek, is based in Europe. The Director of Archetypes Design Ltd. indicated that Autodesk and its key products (AutoAD / Revit) are synonymous with architectural design, and is continuing to win over Nemetschek. As a former Autodesk director pointed out, he main reason Nemetschek is losing out is that it’s extremely difficult to collaborate across Autodesk and Nemetschek software; the technology is incompatible, meaning dominant Autodesk share will continue to push Nemetschek architects to switch. Long-term, Autodesk is also indexed to resilient markets with strong tailwinds, including sustainability and infrastructure, that have recently received significant government funding. 

Scale

Autodesk's massive size in itself enables a durable long-term moat. Because of its scale, Autodesk can afford to spend over ~$1bn on R&D a year on new products, adding to the software’s value surplus.  The Autodesk ecosystem encompasses an expert network of 30.5 thousand active cloud and desktop developers, who publish over 4,200 apps on the Autodesk marketplace, with an annual download count of 1.3 million. Additionally, even if a prospective competitor built all the same products as Autodesk, they would lack the ecosystem and sales channel to distribute the solutions at scale. 

Brand Presence

Autodesk's strong brand presence allows it to benefit from structurally lower CAC, which is a result of AutoCAD and Revit products being the default softwares used to train prospective engineers and architects. Autodesk engages with universities worldwide, training engineering graduates in its software with free access to all their software. Approximately 15% of all students in higher education have had exposure to their products (Founder/CEO at REVx). Given that an estimated only 5.2% of students are pursuing an architecture/engineering related degree, nearly all of this population subset will be familiar with AutoCAD software by the time they enter the workforce. This unique tactic has pushed recent architecture graduates to continue to stick with the software that they’re familiar with. Employers recognize the learning curve for new design programs is very steep and expensive, contributing to a strong moat Autodesk has as the default design platform.

Network Effects

Fluency in Autodesk’s monopolistic offerings are viewed as core skills for professionals in the design and architecture industry. Over 7m people have the AutoCAD skill listed on Linkedin, as compared to less than 250k for the biggest design competitor. The ability to work with AutoCAD  is expected of all design professionals, which creates a self-perpetuating network effect. Additionally, Autodesk’s products exhibit remarkable stickiness, owing to their proprietary data formats, rendering migrations to alternative solutions challenging. Their client base primarily comprises firms rather than individual engineers, enabling Autodesk to take on a mission-critical role in companies to maintain a competitive edge with their designs. 

Switching Costs

Autodesk also has excellent retention, with 105+% NRR for the past three years. Customers cite incredibly high switching costs as one of the main drivers of retention. ServiceNow’s Head of Marketing and Customer Service Management conducts biannual RFPs to evaluate software providers, and has remained with Autodesk for years. He outlines that even if competitors offer 20% discounts for the same product, the cost of training his employees to switch can reach up to 6x that of the discount. Design employees are highly paid (~$80-140/hr), and he estimates that each employee would lose ~100-120 hours of productivity inclusive of initial training, ramping period, and additional certifications needed to reach the same proficiency they currently have in Autodesk. He projected it would cost ~$12k-14k per employee to make that switch. Even if they saved $2,000 per license, the cost would still eclipse savings at 6-7x. With 35 design employees on the software, ServiceNow would have to pay almost $500k to make the switch. Additionally, as referenced in the business overview, Autodesk has extremely strong integrations due to its open API system and extensive developer network.

Pricing Power

Autodesk benefits from its monopoly position in its ability to push pricing, and we anticipate this trend continuing and improving with the business transitions outlined in TP2. We scraped Autodesk’s website to find prices for its flagship products over the past five years. Our scrape of the Autodesk website indicates that they were consistently able to raise prices 5-7% over the past 3 years. They’ve managed this strong pricing power because they have continued to add value to their products without any feasible competition. 

AI Upside

ADSK is poised to be the main benefactor of this secular shift which should result in immense efficiency gains over startups/competitors who lack 1) the required cloud infrastructure to leverage necessary large data sets and 2) full connectivity between design, simulation, and manufacturing. We examined existing AI startups attempting to break into architecture, and found that they’ve been unable to compete directly with Autodesk. The startup Augmenta, which has made the most progress in generative architectural design, functions only as a plug-in that requires Revit; it’s not able to compete with Autodesk’s non-generative AI capabilities. A BIM/CAD Design manager at a full-service professional design firm stated that the industry expects Auotdesk to “acquire AI-focused companies rather than [be] challenged directly.” We believe that AI additions could also contribute significantly to pricing power, with the BIM Graphics Manager at an engineering consultancy anticipating that pricing could increase ~15-20% solely on the basis of AI-enabled efficiency. Generative AI can create feasible designs with less architect labor, higher cost savings, and more energy-efficient features.

Long-Term Outlook

In addition to its enduring revenue growth, Autodesk has best-in-class profitability, exceeding the Rule of 40 for the past few quarters. Autodesk aims to manage to the Rule of 45, targeting ~38-40% FCF margin and ~7-10% revenue growth by FY ’25. Its margins exceed even those of peer oligopolistic vertical SaaS providers, with 92% gross margins v. 84% median and 34% FCF margins v. 28% median.

In conclusion, Autodesk is a steady compounder with strong revenue growth and profitability. The company’s monopoly economics give it significant pricing and volume power, and we expect Autodesk to be able to deliver normalized ~15% revenue growth over the next three years. We believe that the Street is disproportionately focusing on the difficult near-term macro setup (next 1-2 years), and discounting Autodesk’s enduring growth and improving profitability. 

III. Industry Overview

Autodesk competes in AEC, Manufacturing, and Media & Entertainment. Autodesk has an indisputable monopoly in architectural and engineering design. Within manufacturing and construction, Autodesk is not the dominant player but offers compelling solutions at a low price point, and is starting to capture share.

Architecture, Engineering, Construction (AEC)

Architecture

Autodesk remains inarguably best-in-class within architectural 3D design, holding >90% market share. While there are various smaller products competing in the marketplace, there is a large dropoff after Autodesk’s Revit, with Revit holding more than 70% market share. In coming years, Revit will continue to take the remaining share from companies like Nemetschek. 

According to a Virtual Design & Construction Executive at McCownGordon Construction, architecture firms’ design team work with Revit for nearly eight hours a day on average, with companies holding at least 50 Revit licenses per cycle. This hold on the architecture industry creates a positive network effect, where significant market share of Revit pushes the other prospective clients to collaborate and share files through Revit.

Infrastructure

Autodesk is well positioned to take advantage of macro tailwinds in infrastructure with major disruptions in government programs. In particular, with Biden’s Infrastructure Bill expected to invest $17 billion in waterways, $25 billion in airports, and $100 million to help departments drive digital technologies, we are seeing an unprecedented demand in digital transformations within infrastructure companies.

Additionally, the United States federal government-wide compliance program FedRAMP has launched ADSK for the government with Authority to Operate (ATO) from General Services Administration (GSA). They have also increased infrastructure spend, leading to more opportunities in the Infrastructure Investment and Jobs Act. 

Within this space, Bentley remains ADSK’s only main competitor for larger infrastructure companies and projects. While the DOT market has remained largely dominated by Bentley, ADSK has been gaining share in recent years. ADSK’s expansion into aviation and acquisition of Innovyze for water infrastructure software allows traction gain within the space. Already, California, New York, Florida, Texas and Oregon’s Department of Transportation (DOT) have adopted Autodesk’s Civil 3D and BIM 360 for various projects, Innovyze for water management as a levering point. Furthermore, Iowa’s DOT recently led a migration of a consortium of 20 DOT’s from legacy 2D projects to Autodesk BIM delivery processes (which are more efficient and sustainable). 

Construction

Autodesk is well positioned to capture share within the construction industry. Construction is a contract, cash flow-based business – projects typically operate on as little as a 1-2.5% margin. The value-add for SaaS solutions for Autodesk Build & BuildingConnected comes from savings against waste costs through data for facilities and improved operations maintenance (generally between 20-30%). The construction opportunity represents a nearly $264k IT budget spend per employee.

The main SaaS competitor for Autodesk is Procore, and Trimble and Oracle also compete as legacy providers. Due to significant recent acquisitions and successful integration of new technologies, Autodesk’s Plangrid is approximately on the same level as Procore. Additionally, ADSK has far superior go-to-market abilities: Former notes “Autodesk has by far the slickest, most efficient sales and marketing organization in the business.”

Manufacturing (MFG)

Autodesk offers discrete solutions for manufacturing tech companies. Similarly to Architecture, the manufacturing space has been undergoing a transition from 2D to 3D. While not the market leader, Autodesk’s offerings boast a compelling breadth of capabilities at a low price point; their Fusion product additionally provides an easy ramp-on system into the cloud ecosystem, which is attractive to potential customers looking to switch away from legacy providers such as PTC. Within the competitive landscape, Autodesk’s cohesive products are propelled by tailwinds such as increasing demand for “digital twins,” a digital replica of a physical building.

Media & Entertainment (M&E)

Autodesk is a market leader in the media & entertainment complex graphic design industry with their Maya and 3D Studio Max products – Maya has been used by almost every Oscar winner for special effects in the last 15-20 years. Competitors such as Doubleclick, Side Effects, Cinema 4D (owned by Nemetschek), and Renderman are smaller brands that focus on specific niches of the design process:  Autodesk wins because they offer a superior product at a competitive price. However, M&E penetration is high and TAM is limited so management has shifted their emphasis in the last few years towards construction and manufacturing where there is more greenfield for growth. 

IV. Thesis Points

TP1: Misunderstood negative macroeconomic factors creates a compelling entry

ADSK operates in cyclical, but durable end markets and is uniquely situated in the value chain to have disproportionate resilience to a negative macro downturn. Investors are incorrectly extrapolating the short term outlook that creates an attractive entry price for a long term earnings compounder. 

Resilience in Macro Downturns:

During the 2008/09 crisis, construction spend declined 15% in 2009 and 11% in 2010; at the same time, Autodesk’s maintenance revenue grew 29% in 2008, then 3% in 2010. Although the maintenance revenue growth dipped into LSD, it quickly accelerated again to MDD. Autodesk’s competitive advantages and stickiness contributed significantly to its outperformance of the construction space. The product is only ~0.63% of architecture revenue, and ~0.8% of costs. As a result, the product is a small proportion of customer costs, suggesting it would be one of the last products cut.

Consensus concern: 

The lack of diversified end markets is the tradeoff vertical SaaS players make for superior financial profiles which tends to make them especially vulnerable to macro downturns. The street has seen the softening of end market spend and decelerating expectations for earnings growth and attached the traditional fears that are only justified for other vertical SaaS players. Firstly, within the segments that ADSK has monopolistic share, the street is concerned that a tightening macro leaves no levers for continued growth. Second, investor faith in the ability of ADSK to capture share in nascent markets has dwindled. Finally, investors are over indexing to confounding metrics like IT budget spend that drives them to believe the overall business will experience heightened churn and price sensitivity. 

Unique positioning buffers macro:

ADSK sits in a unique position in the value chain where end market demand has a more muted impact on performance than realized. The software is mission critical for the majority of jobs completed with it, so the lower bound of volume an architect or construction worker would need to justify maintaining their subscription is very low. Additionally, the lag between the design process and the completion of the structure provides a buffer for the budget of the construction company to allow macro to reach a more positive part of the cycle and for demand to increase before they would reevaluate their contracts. Additionally, the diversity of ADSK’s product suite allows for enough end market diversification to maintain positive traction in the negative environment. Even during the economic downturns of the Dot-Com Bubble in 2001, the Great Financial Crisis of 2008, and Covid-19, Autodesk’s revenue did not experience significant declines, while US construction and infrastructure spending continued to grow steadily.

Cyclical means it'll go back up too:

Some of the more nascent markets that ADSK seeks to capture share in are cyclical and from our analysis we have seen that the overarching macroeconomic state has layered on top of being down cycle creating a larger amplitude than we’ve seen historically. We believe that the softening macro is not any indication of broader secular decline, but rather an accentuated cycle that we have seen before that bodes well for a rebound in FY25 and beyond. 

Enduring end markets:

ADSK’s reliance notwithstanding, we acknowledge that macro remains a headwind, however, our analysis shows that leading indicators that more directly tie to ADSK’s results look promising for FY25 and FY26. We are seeing a continued demand for the employees that would be using the software even if the projects that the employees would be working on have slowed. Specifically, the job replacement cycles look healthy as the supply of prospective users remains inline with historical growth. Additionally, we scraped job postings from the top architecture and construction companies to get a pulse on shorter term relative labor demand which also looks healthy and bodes well for the future. We think these factors are stronger indicators of the longer term outlook than the consensus analysis in tracking IT budget spend. We believe that the previous interest rate environment, especially through COVID, has led to significant overspend in non-essential software and has bloated budgets in a way that needed the drawback to return to normal levels. This drawback will disproportionately be alleviated by the non-essential software instead of the mission critical software in ADSK’s product suite. 

Conclusion:

Our analysis concludes that the macro headwinds are currently priced in, as we expect a soft conclusion to FY24, but are differentiated in that we recognize what decel to attribute to macro and what we expect to recover. Looking ahead, Autodesk is poised to capitalize on the forthcoming recovery of the construcTion industry. This is expected to be driven by factors such as increased adoption of cloud-based and digital solutions and the broadening of its addressable market. By 2025 through 2026, we anticipate that Autodesk will regain its normalized subscriber growth trajectory, further solidifying its position as a resilient player in the market.

TP2: ADSK’s long term future earnings growth remains intact and durable

Overfixation on the cloudy transition financials have directed attention away from the pricing power and margin expansion opportunities that are levers for continued long-term earnings growth.

Cloudy financials will eventually clear:

Investors are hyper fixated on the end market macro backdrop and thus neglect the impacts of one-time and transitory decelerating factors that have especially affected FCF and Billings. Management has claimed the impacts of FX rates have been a significant headwind in the tail end of FY23 and 1H FY24 and are expecting a continuation of headwinds for FY24 margins to clear up by FY25. Additionally, ADSK switched from solely offering multi-year upfront contracts to allowing for them to be billed on an annual basis instead in 1Q24. This change was a bet on the direct tradeoff in long term value between the loss coming from churn at the annual renewal and the positive from upsell opportunities that are garnered during the renewal process. This bet on product quality essentially gives another touch point for introducing marketing, new products, and price increases. Management expects this to be a significant headwind to short term billings and free cash flow in FY24 and slightly less so in FY25 as the contract cycles smooth out. Although the cloud/subscription transition began in 2016, it still contributes to the cloudiness of ADSK’s financials. In particular the migration from serial numbers (which were especially susceptible to piracy and shared usage) to named users with better security and control. ADSK provided discounts and other incentives that obscured ARPS growth in the migration of single-user accounts that was completed in 2021, however is still working on migrating multi-user accounts which had the more significant piracy issue. Named user accounts are offered to allow the switch of two named user accounts for the price of one which will continue to be a headwind to ARPS until the expected completion in Feb. 2024. Even still, major world events and geopolitical events have made y/y comparisons and factor separation incredibly difficult. All considered we expect the headwinds to FCF, billings, and ARPS to abate by FY25.

Monopolistic Economics Enable Pricing Power:

Autodesk’s best-in-class product offerings have enabled durable pricing power that has been intelligently exercised and will continue to be exercised through a combination of leveraging monopolistic economics, inorganic value-adds, and exciting innovation. Management has been able to historically increase pricing in a disciplined way as a result of the software being mission critical, having high switching costs, and the feature advantageous from superior data. We scraped the Wayback Machine to plot out previous pricing increases which corroborate our qualitative with > 5% annual increases. Additionally, strategic inorganic efforts in acquisitions such as PlanGrid and Innovyze have consistently increased the value that the product suites provide which generates a “value surplus” to justify future price increases. Especially within their nascent markets, we expect management to continue to do so in a disciplined manner. Finally the end markets that ADSK is entering have historically been underserved technologically which leaves plenty of room for internal innovation to justify price increases. 

Margin Uplift:

Autodesk is undergoing a sales channel transition, aiming for a 50/50 direct/indirect split LT. Historically, Autodesk has relied more on 3rd party resellers (now ~65% of revenue) as they focused on scaling without building out distribution internally. ADSK has grown into a brand name since then, and is looking to increase direct sales. In order to figure out sales efficiency for direct vs. indirect sales, we estimated the breakdown of direct / indirect S&M by allocating % of S&M from ADSK headcount vs. other. We found ADSK’s employee breakdown across roles on LinkedIn, then matched roles with departments and expenses. The direct S&M margin is ~26.5% v. indirect S&M margin at ~31.3%. Sales efficiency of both direct / indirect continue to increase, as the shift to direct also brings down the mixed S&M margin. As a result, we project that S&M will approach ~24% by FY27 from ~29% currently. 

Top Line Uplift:

Due to the lengthened adoption curve of ADSK’s end markets, they’ve contended with an obscured and elongated cloud /subscription transition process. Our analysis shows that conversion efforts have and will continue to act as temporary headwinds to top line growth, however the underlying opportunity remains intact and the transition strategy will pay off in the long term. The nature of ADSK customers’ use case for their products has made it such that the transition to cloud /subscription has been both slow and required significant incentives. Compared to many other cloud transition stories, one would expect that the long term uplift has already been realized, however, ADSK is still using natural and intentional strategic efforts to tap into this value. We anticipate a continued uplift over the next 3 - 5 years as a result of 1) operating system forced updates in which the aggregate benefit of updating the underlying operating system (e.g. Windows XP to Windows 7) would force a transition from non-compliant software  2) company efforts to shut down piracy 3) completion of incentive programs. In line with the aforementioned narrative, management has shown a dedication to maximizing long term earnings of the business. One of the final transitions has been with the transition of multi user accounts from serial numbers to “named accounts”. The important takeaway here is that there are still structural changes that upon completion leave ADSK a better company with a higher upper bound for their financial quality.

TP 3: Construction is Reaching an Inflection Point

We believe the Street is underestimating Autodesk’s traction in construction “due to inherent cyclicality of its end-markets, including in manufacturing and commercial construction.” While we acknowledge the current macro slowdown in TP1, we believe that Autodesk’s construction product will continue to significantly outpace the market, and provide an uplift to top line and low-hanging cross-sell opportunities.

Upon acquisition in Dec. ’18, Autodesk announced that PlanGrid was projected to contribute ~$100mm ARR in FY ’20, up from ~$60-70mm CY ’18 ARR (implying 50% YoY growth). PlanGrid also had ~12,000 customers. Although Autodesk has not broken out construction stats since, we believe the Street is significantly undervaluing Autodesk’s construction opportunity and traction. PlanGrid was only ~2.5% of Autodesk’s FY '19 revenue, so even strong growth in the segment was easily overlooked among the transitions mentioned in TP2. As Autodesk Build (formerly PlanGrid) continues to grow as a % of revenue, we believe its strong growth will begin to show a 100-200 bps uplift to topline. Autodesk recently improved integrations for its construction products, which we believe was the main technical holdback. We believe the resolution of those issues has been a catalyst for continued acceleration of the construction business.

Autodesk Build, which makes up the majority of Autodesk’s construction revenue, focuses on project management and collaboration. Its main competitor, Procore, has ~50% revenue from project management and the rest from financial management software and additional modules. Because Autodesk only has the former, we estimate that Autodesk’s pricing is < 30-40% that of Procore. A former Senior Sales Manager at Procore confirmed that Autodesk’s construction product was less than half the price of Procore’s, which we estimate to be ~$60k ARR per customer. As a result, we estimate that Autodesk’s ARR per customer is ~$15k, or ~25% of Procore (implying a ~23% CAGR).

At the Mar. ’23 Investor Day, Autodesk announced that they added 1k customers in Q3 and Q4 each. At a 4k annual customer run-rate, we expect that Autodesk Build has now reached ~32k customers. Using these values, we estimate that Autodesk Build’s ARR has grown from $65mm at CYE '18 to $480mm at CYE ’23. As a result, we believe that Autodesk Build now makes up ~9% of Autodesk revenue (v. 2.5% at CYE ’18) and ~19% of AEC revenue (v. 6% at CYE’18). Projecting forward, we anticipate 30% growth in Autodesk Build in FY '24. Despite the difficult macro conditions, we believe the significant backlog and greenfield opportunity within construction will continue to sustain the growth rate. Additionally, Procore is up 18% YTD. Procore is projected to grow similarly, with consensus guiding towards 28% YoY growth in Autodesk’s FY '24. 

Procore and Autodesk are the dominant construction software providers, and Procore has ~900mm ARR, implying a ~66% / 34% share split between Autodesk and Procore. This valuation aligns with channel checks – the CEO of a tech consultancy specializing in construction design indicated that “Procore and Autodesk still dominate with a split of ~70/30, which hasn’t changed.” We conservatively project that Autodesk will grow in-line with Procore and maintain the 70/30 share, although several dynamics suggest that Autodesk is well-positioned and beginning to take share. 

At the 2023 Investor Day, Autodesk had 75k construction service providers as design customers who did not use Construction Cloud. If we assume Autodesk successfully converts half of these customers over the next five years with pricing in-line ($15k), they represent a $563mm ARR opportunity. Companies choose Autodesk over Procore due to “architect preferences,” and Autodesk Construction Cloud’s (ACC) “product maturity, improved feature set, and better integration with other apps.” Customers also indicate that Autodesk is “improving relative to Procore” as their construction integrations have started to improve, driving Autodesk wins. Although Autodesk does not currently offer financial management construction software, customers often prefer to use the same platform for all needs, which is expected to “earn companies savings in about 12-14 months, in the 30-40% range.” With the largest product suite and over 175 integrations compatible with ACC, Autodesk is best-positioned to win over these customers. Finally, we believe Autodesk is more attractive than Procore for the customers who have no existing construction software. These customers (~50% TAM) usually use Excel spreadsheets to keep track, and are often less technologically savvy and have smaller tech budgets while large customers with deep tech pockets would likely have already adopted Procore. As a result, the smaller customers are more likely to choose Autodesk as a budget-friendly solution with growing integrations.

In conclusion, we believe that the Street significantly undervalues Autodesk’s construction segment. We believe that the Street has written off Autodesk’s progress in construction because “ongoing macro uncertainty currently overshadows company-specific drivers” and “leaves us questioning the achievability of its TAM.” By breaking out the construction segment, we expect to see a 1-2% uplift to revenue growth as a result of strength in construction growth. Over the next few years, we anticipate cross-sell opportunities from in-network construction providers and greenfield customers. In the long-term, we expect to see Autodesk continue expanding their cloud offerings and financial management software to offer feature parity and stronger integrations at better prices, winning share in a growing market.

V. Valuation

Our analysis leaves us to believe that FY24 will mostly stay in line with consensus as we resolve transitory accounting cloudiness and expect beats on earnings in FY25 and FY26. We ascribe a 23x Fwd. EBITDA multiple in the out year getting us to ~23% IRR in 3 years. We also project an exceptional risk reward as a result of the downside protection from ADSK’s macro resilience and monopolistic economics. The key takeaway in our analysis is the defensibility of earnings providing our downside protection and the underrated upside potential from the nascent markets.

VI. Risks & Mitigants

Risk 1: High Churn

One potential risk is the high churn rate, as customers might seek cheaper solutions to reduce overhead costs. The costs absorbed could eventually price customers out if there are minimal incremental functional gains.

Switching costs, however, including researching a new company and adapting to new technology, often make it not worthwhile for clients to leave Autodesk. For them to depart, they would have to fire a significant portion of clients and incur a substantial revenue hit. License changes affect all companies equally, leading to an equal rise in overhead costs.

Risk 2: Macroeconomic Downturn in FY25 and FY26

Another concern is a macroeconomic downturn worse than expected in fiscal years 2025 and 2026. This could negatively impact construction and infrastructure spending, resulting in adverse long-term growth revisions by financial analysts.

Autodesk's sticky subscription revenues and substantial backlog would potentially result in lower relative underperformance compared to industry peers. Moreover, significant opportunities in greenfield construction might offset the macro-driven slowdown in core segments.

Risk 3: Startup Disruption and Competition

There is a risk of startups disrupting Autodesk's monopolistic competitive positioning. Core products, such as AutoCAD, could lose market share due to unforeseen competition emerging in the market.

Autodesk's proactive approach includes being highly acquisitive, allowing them to consider purchasing startups before they mature into serious competitive threats. Additionally, many knockoffs of Autodesk's core offerings have failed to gain significant traction due to lower-than-expected customer adoption and high switching costs.

Catalyst

1) Conclusion of billing / named user business transitions over the next 2-3 years will normalize financials

2) Traction of AI products in the architecture / construction software space

3) Construction segment customer wins of more in-network construction providers