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Back to the Drawing Board for Autodesk

Stocks in this article: ADSK CDNS ADBE MSFT

NEW YORK ( TheStreet) -- Since reaching a high of $41.42 on March 20, shares of CAD/CAM software company Autodesk (ADSK) have plummeted by 11%. Until that point, however, the stock had been on an incredible run, gaining close to 20% on the year. When it comes to Autodesk, which has had a long-standing struggle with revenue growth, investors can never seem to make up their minds.

On the one hand, I have to credit management for how well they have navigated a tough IT spending environment. The manner in which Autodesk has maintained margins and executed some tough cost-control initiatives has been impressive. But here's the thing - for a tech company that is trading at a price-to-earnings ratio of 38, which is almost 4 times that of rival Cadence Design (CDNS), Autodesk, which posted 1% revenue decline this quarter, has been unable to justify investors' optimism.

Accordingly, the stock, which has received (among others) a "strong sell" recommendation, has shed another 5.5% since second-quarter earnings were released. It's been a recurring theme - one that has now gone on for far too long. With management issuing uninspiring guidance, which incited an aura of "fiscal uncertainty", it's anyone's guess when Autodesk will be able to "draw up" a growth plan that investors can feel good about. Until then, owning this stock may unveil an unwanted blueprint to further losses.

By contrast, take, for instance, Adobe (ADBE), which has had its own issues with growth. But Adobe never assumed that growth was going to magically appear just because it had a sizable lead in its end-market. Unlike Autodesk, which seems to have rested on its laurels, Adobe went entirely in the opposite direction. The company completely changing its business structure from selling traditional software that is sold in a box to a cloud-based subscription model - effectively changing its fortunes overnight as the company continues to exceed subscription estimates.

Autodesk, on the other hand, reported an 8% drop in license revenue. There was a point when Autodesk's profitability allowed me to shrug my shoulders and look the other way. Essentially, even though the top line was weak, the company was still raking in the cash. Today, with gross margin dropping by more than 1%, as operating income declined by 5%, the company has lost the benefit of the doubt. And I believe - in the manner of Adobe - Autodesk now needs to go back to the drawing board to reassess the direction of the business.

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