Autodesk Is Overpriced, So Sell and Take Profits Ahead of Earnings

NEW YORK (TheStreet) -- It would be a gross understatement to say expectations are high for architectural software design specialist Autodesk (ADSK). Ahead of the company's first-quarter earnings results Tuesday, ADSK stock is valued at 168 times earnings, which is eight times higher than the average for the S&P 500. This means investors are betting a lot on ADSK stock to deliver future profits. But when's that going to happen?

Autodesk was trading Monday morning at $58.49, down about 0.5%. While the shares are down about 2.6% on the year, they've done well over the past twelve months, gaining about 23%, against 11% gains for the Dow Jones Industrial Average (DJI). And for this reason -- among others -- investors should lock in some profits and move on to better prospects.

After its earnings for the last fiscal year fell 65%, Autodesk is projected to only break even in fiscal 2016, earning $1.17 per share. And even though 2017 estimates of $1.43 imply 22% growth, revenue is projected to grow at only around 3% for all of 2017, suggesting much of that anticipated earnings growth would be owed to things like restructuring, cost-cutting and stock buybacks.

To its credit, Autodesk, headquartered in San Rafael, California, has done what once appeared impossible -- transforming how its sells traditional software from delivering its products in boxes to a subscription-based license model. It's the same sort of shift that has been successful for the likes of Adobe (ADBE). And it has served Autodesk well.

In its fiscal 2015 fourth quarter, for instance, the company grew its subscription business by 17% to more than $300 million, topping estimates. Equally impressive was the 10% year-over-year jump in its license business, reaching $310.3 million after accounting for other revenue sources. Better still, the 28% climb in its deferred revenue, buoyed by the subscription growth, was encouraging.

But Autodesk is spending a lot to propel this growth. Operating expenses surged 22% year over year to over $500 million. This means its expenses are growing faster than both its subscription business and license business. This can't continue indefinitely, given the profits investors are expecting based on the outsized P/E ratio they're attaching to this stock.

And it is more than likely that Autodesk will continue to spend to achieve the growth rate baked into that 168 P/E. If it were trading at the current average P/E for its industry of 83, ASDK would be around $30 today, not $58. Based on that, the company is destined to remain under pressure to live up to the expectations implied by its stock price, until either the price corrects itself, or the earnings appear.

The way I see it, the 3.10% projected revenue growth for next year, which implies a slowdown of 1.4 percentage points from the 4.5% estimated growth for fiscal-year 2016, doesn't provide the fuel it would take to power a bullish argument for Autodesk. Investors with a yen to bet on software companies would be better served looking for value elsewhere, especially in stocks that pay dividends, such as Microsoft (MSFT) or Oracle (ORCL).

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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