Autodesk is expanding its moat again. Here’s why the stock is a must


Engineering and design software company Autodesk (ADSK -1.79%) has a fantastic competitive edge, also known as a moat. With high switching costs and embedded use in classrooms around the world, the company has dominated the architecture, engineering, and construction software market for decades.

This has resulted in phenomenal stock returns, with shares up over 62,000% since going public in the 1980s. The company recently reported strong second quarter results with revenue growing 17% year over year amid a challenging macroeconomic environment and negative foreign exchange rates.

But the company is not resting on its laurels. Here are three ways Autodesk is expanding its already strong moat and why the stock should be in your portfolio today.

A software backend

Autodesk has dozens of products that serve a variety of end markets. These have all been acquired regularly over the past few decades to provide Autodesk with a comprehensive product offering in the various target industries. For example, in infrastructure and construction, there is Revit (architectural design), Civil 3D (civil engineering design), Autodesk Build (construction management software), Innovyze (water supply software), and many other programs.

In the past, all of these software programs worked somewhat separately from each other, even when the end customers worked together. Now Autodesk plans to change that by building a technology backend to connect the dozens of products it offers. Here’s CEO Andrew Anagnost on the latest quarterly conference call:

It’s also really difficult to consistently provide multi-platform support, multi-device support, cloud computing, and AI automation, which is a real challenge. So we’re moving away from that kind of disjointed product portfolio to really having a set of platforms targeting each of our industries with some underlying core technologies supporting everything.

This will be a multi-year task, the benefits of which may not be reaped immediately by investors. But over the long term, it should help Autodesk run its suite of products seamlessly and more efficiently.

Vertical integration and interoperability

With all of these acquisitions, Autodesk has now vertically integrated the software market with the industries it serves. Additionally, it ensures that each software program works well with the others in its portfolio. During the second quarter conference call, Anagnost spoke at length about how the company is working to provide customers with better data connectivity and communication over the cloud across all of its various software programs. Given the high level of communication and data exchange required on large construction projects, this interoperability will help extend Autodesk’s advantage over competing software vendors.

Imagine you are a company trying to compete with one of Autodesk’s products. If you only offer architectural design, you will be at a great disadvantage when selling products to clients, as your software is not set up to work seamlessly with other parts of a project. For this reason, even if the software program has equivalent or even better tools than an Autodesk solution, customers will tend to use Autodesk.

Bundled Corporate Contracts

Finally, Autodesk was really smart when it came to offering enterprise packages for all of its software programs. This isn’t a revolutionary concept, but something that further deepens its lead over other software vendors. Management routinely highlights multimillion-dollar deals — and even some tens of millions-of-dollar deals — where large construction companies buy long-term contracts for all the different software programs they need. No other single company can offer all of Autodesk’s software solutions, making it the likely choice for large construction companies when they need a software partner.

The best thing about Autodesk is that you can now buy the stock at a reasonable price. With a market cap of $45 billion, the stock trades at a forward price-to-free cash flow (P/FCF) of 22 based on mid-point full-year guidance. With competitive advantages so strong that management is working to deepen them further, the stock is an easy buy right now.


Comments are closed.