Why Autodesk shares fell in June

What happened

Stocks of an engineering and design software company Autodesk (ADSK 1.10%) fell 17.2% in June, according to data provided by S&P Global Market Intelligence. The move comes in a weak month for industrial software vendors as the market has been plagued by concerns about the impact of rising interest rates on economic growth. Slowing growth is a problem for Autodesk because it makes software for the design and build (architecture, engineering, and construction) and design and manufacturing (manufacturing) end markets. Therefore, when its customers see tougher times ahead, they usually reduce their development expenses.

So what

The market speculating on slowing economic growth does not necessarily mean it will happen. However, investors are understandably selling Autodesk on these concerns. After all, the company could be considered at risk due to management’s declining free cash flow (FCF) expectations in recent years. For example, he previously told investors to expect $2.4 billion in FCF in fiscal 2023 (the company’s 2023 second quarter will end in July) and investors took that into account with future growth assumptions.

However, in September, management told investors to expect lower FCF in fiscal 2024 due to a change in how it bills customers, resulting in longer-term cash flow with less upfront.

That’s fair enough, but Autodesk missed its initial FY2022 FCF forecast of $1.575 billion to $1.65, returning just $1.48 billion.

Fast forward to fiscal year 2023 (most of which is in 2022) and management has reduced its long-standing target of $2.4 billion in FCF to a new range of $2.13 billion at 2 .21 billion due to the deterioration of the economic environment and unfavorable exchange rate movements .

In the first quarter of fiscal 2023, management reduced the FCF guidance for fiscal 2023 to a range of $2 billion to $2.08 billion.

Given this recent history of forecast cuts, the market is obviously preparing for the same in the upcoming results (Q2 2023).

Now what

It’s never good news when a company lowers its forecast. Still, it’s important to keep a cool head and reflect that Autodesk is still an exciting growth company with long-term growth ahead. Moreover, its current market capitalization is only $37.8 billion. So even if Autodesk lowers its full-year FCF forecast from, say, $200 million to around $1.8 billion, it will be trading at a multiple of 21 times FCF to FCF – an excellent valuation for a growing business.

Abdul J. Gaspar