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Autodesk (ADSK) Stock | NASDAQ: ADSK

Covered by Stratosphere

Designing The Modern World

Autodesk is an application software company that serves industries in architecture, engineering, and construction; product design and manufacturing; and media and entertainment. Autodesk software enables design, modelling, and rendering needs of these industries. The company has millions of paid subscribers across 180 countries. Autodesk makes software for people who make things.

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Balance Sheet

Braden Dennis


Braden Dennis


Investment Thesis

  1. Autodesk offers a suite of software in Computer-Aided Design ("CAD") for various industries that have been leading the market in their categories for decades. This includes the well-known design software, AutoCAD.

  2. The business has a deep moat in serving the Architecture, Engineering, and Construction ("AEC") industries. A growing opportunity for Autodesk is arising in manufacturing, media, and entertainment.

  3. The software products are very sticky and billed on a recurring subscription to customers. It can take decades to fully master Autodesk's software, including the flagship products, AutoCAD and Revit. Skilled professionals like engineers often learn the software in post-secondary education and further their knowledge with the products after entering the industry. This helps Autodesk record low subscriber churn consistently. This transition to a recurring subscription to Autodesk’s products in the cloud, or software-as-a-service ("SaaS") created short-term pain for the business. Now that the transition is complete, growth and margins have been excellent.

  4. Autodesk has millions of non-compliant users who are using the software for free. Autodesk believes they can convert a good amount of users in the 7 million group that are using new versions of the software (last 5 years) and have more than 4 active sessions on the product in the last 90 days. Long-term, Autodesk is in a position to convert many of these active users as they will require an ongoing subscription to receive the most up-to-date product versions. The completed SaaS transition helps with this as new versions can be deployed to existing customers easily.

  5. Autodesk is in a position to capture secular global growth in infrastructure, computer-aided design across new industries, and the increased trend of CAD in manufacturing.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Switching Costs

Autodesk makes software for people who "make things". Its clients primarily work in the AEC industries. The company has become the de facto standard in digital design because of its early presence and innovation in the CAD industry. A game-changer for drafting (i.e., the verb for creating technical drawings), AutoCAD remains a flagship product for Autodesk for over 40 years.

It can take decades to master Autodesk software, especially AutoCAD and Revit. The company has become so embedded in these industries that secondary and post-secondary schools teach AEC students studying architecture using these products. In turn, the company sponsors education programs that involve its products.

Many of these students continue to use Autodesk's products for long periods of time. Not only does it boost their resume for potential employment in the AEC fields, but they will also use it throughout their working lives. The more familiar they get with Autodesk's products, the better work these individuals will be able to produce.

Additionally, operational disruption and downtime costs discourage companies from changing CAD providers. It typically takes a lot of time to migrate all existing data to a new software platform as well as substantial financial and training resources to learn a new platform.

Overall, there is very low churn due to the massive switching costs associated with using a competitor's software. Autodesk recognizes these switching costs and charges a premium price for its products while maintaining a net retention range of 100 - 110%.

Product Ecosystem

Autodesk's platform contains many products. There are almost 80 of them today, according to the Autodesk website. The company's product range serves the exact needs of each customer due to the capability and financial flexibility inherent in the platform with the many products.

Autodesk has made a few acquisitions to boost its platform offering. For instance, Autodesk purchased PlanGrid, a construction management software provider, for $875M in 2018. Autodesk's acquisitions bolster the ecosystem of software products to better serve its verticals.

Autodesk offers customers a basket of applications to get the job done. These applications all serve different purposes but come together to complete ad hoc projects. Autodesk capitalizes on this opportunity to cross-sell its products.

The company also continues to introduce new products and update existing ones, which brings in new customers while giving old customers a reason to stay in the company’s product ecosystem.

These improvement efforts attract more users into its ecosystem, which upholds a powerful network effect. Autodesk has become a common platform for designers and manufacturers. There are strong network effects present in that new users are most likely to learn Autodesk, current users will continue specializing on Autodesk, and in turn, more and more companies will switch to Autodesk. Financial and educational resources will continue flowing towards Autodesk for as long as it maintains a high standing in the AEC industries.

Entrenched Integrations

The entire AEC market and its ecosystem of tech products all rely on Autodesk.

The firm dominates when it comes to industry standard file types. For example, architects generally use AutoCAD for their product flow and refuse other file types. Vendors and contractors, therefore, are stuck unless they use AutoCAD to standardize the designs and collaborate seamlessly with architects and other stakeholders.

Through this, a standard in one part of the value chain becomes the standard down the value chain for industries that communicate with CAD.

As a result of industry consolidation and standardization around Autodesk's products, software companies generally choose to build on top of Autodesk’s existing software and integrate with Autodesk's ecosystem as opposed to fight against it.

Additionally, Autodesk's technological depth and power, scale, and size of its reseller network are unmatched. Any emerging competitor who would dare try to disrupt Autodesk would need to commit a significant outpouring of financial and time investments, as well as spend years accumulating the industry expertise, integrations, and customer relationships to pose any serious threat.

Recurring Revenue Profile

Autodesk's software products are sticky and billed on a recurring subscription to customers.

Although Autodesk was late to transitioning to the SaaS model that is now the industry standard, it was a major success for the company. This occurred after Autodesk discontinued the sale of its commercial licenses in 2016. Recurring revenues were only around 40% in the license model, and the company has since then undergone a (temporarily) painful transition from the traditional software licensing model.

Today, recurring revenues make up nearly 100% of revenues, net retention rates are consistently above 100%, and gross margins are astronomically high. Of course, because the company's financial results are now highly predictable, the Autodesk business commands a premium valuation in the public market.

Autodesk Revenue Graph

Opportunities Ahead

  • There a millions of users who use Autodesk today without paying. Autodesk believes they can convert a large amount of users in a group of about 7 million individuals that have been using the newest versions of the software (last 5 years) and have more than 4 active sessions on the product in the last 90 days. Additionally, Autodesk offers a free one-year educational access to Autodesk products for students and educators. This is a great opportunity as there is a much higher chance these users will convert to paying subscriptions through work when they finish school and are more familiar with the product. Mastery takes time and Autodesk is willing to give students the opportunity to learn. The conversion of these groups to Autodesk's SaaS offering would provide tons of revenue for years to come.

  • Fusion360 is an application encompassing the likes of AutoCAD and Inventor in one piece of software, and it is gaining traction quickly. This was an unconventional release as the application took inspiration from a variety of pre-existing Autodesk applications mashed into one. The application has the capability to design and simulate 3D models based out of 2D drawings. It is a powerful tool for those in manufacturing and product design. Increasing numbers of individuals are switching to Fusion360 because of its efficiency compared using Investor and AutoCAD separately. Today, Fusion360 has almost 650,000 monthly active users (and counting). We believe the versatility of the platform and its demand in the market along with the well-known network effects inherent in Autodesk's ecosystem will help scale this product.

  • Autodesk operates in the growing AEC industries, but also appeals to other use cases — product design, manufacturing, digital media, and entertainment. Each of these industries are crucial to the world's advancement while also undergoing heavy digitization, half due to COVID and half because of trends that were already in place. We see the following main opportunities:

    1. The convergence of design and manufacturing by shifting to cloud solutions provides the opportunity for automation, process digitization, smart products and supply chain optimization. Autodesk SVP, Scott Reese, believes the convergence of design and manufacturing is a $33 billion total addressable market for the business by 2025.

    2. In today's day and age, CAD products are needed in order to plan out and design infrastructure projects. Autodesk offers customers a basket of applications to get the job done, including Revit, Inventor, and AutoCAD. These applications all serve unique purposes but can come together seamlessly to complete one major project. Autodesk capitalizes on this opportunity to cross-sell its products to help organizations get work done.

    3. Autodesk users have been using CAD software for decades. But now, Autodesk is now heavily marketing the Construction Cloud. This cloud has four separate applications: (1) Design (2) Plan (3) Build (4) Operate. Autodesk Construction Cloud is split into four different applications: Design, Plan, Build, and Operate. The Construction Cloud is a one-stop-shop for project managers, creating a seamless integration between the aforementioned four applications found within the software. We think adoption of this new cloud-based software will continue to rise.

    4. Autodesk's current successes in manufacturing can be attributed to the "core" design products. Going forward, Autodesk is looking to converge Design and Make by focusing on generative design and intelligent automation. Once converged and automation capabilities are set up, there is a potential $14 billion opportunity for Autodesk to spearhead.

Autodesk Next-Gen Manufacturing DisruptionSource: Autodesk Investor Presentation


Stock-Based Compensation

Autodesk is notorious for "paying" out a ton of stock-based compensation ("SBC"). Per GAAP accounting rules, however, stock-based compensation is not considered a cash expense, and, therefore, is excluded from the free cash flow calculation.

We believe this is incorrect for two reasons:

  1. SBC is usually paid in lieu of cash. In other words, if SBC was not paid, Autodesk's employees would ask for cash compensation in its place. Theoretically, then, SBC is a "real expenses" despite not being a cash expense that should be included in free cash flow (i.e., not added back to net income in the calculation of free cash flow).

  2. Autodesk buys back a lot of stock not to return capital to shareholders, but to offset dilution from the SBC. This proves the cash expense nature of the SBC, and further backs our point that SBC should not be added back.

Although widely known by many, it is important to make projections of Autodesk's free cash flow with the large amount of SBC in mind. Adjusted EPS and free cash flow figures presented in Autodesk's investor relations material may not be fully accurate of the leftover cash attributable to equity holders (i.e., shareholders).

The add-back of SBC that occurs also makes valuation multiples look better than they truly are.

Non-Compliant Users

What is fortunately an opportunity is also, in many ways, a large risk to Autodesk.

Autodesk is banking on converting many of these users to paid users in order to drive revenue growth over the next several years.

In the Credit Suisse 25th Annual Technology Conference, Autodesk CEO, Andrew Anagnost, stated "and remember, we're constantly creating new pirates. So as we capture new ones, we're constantly creating other ones. All right, so I think the opportunity is paying off the way we expected. But again, as I always say, don't look for us to try to pull that forward. We never pull the non-compliant lever in any quarter because we're just letting it kind of steady drumbeat up.".

So, just because some non-compliant users have been converted to the paid SaaS version does not mean new pirates are being made. The statement above does not provide us with loads of confidence that management will be able to slow down pirating if it were to get worse, or if pricing gets to an unsatisfactory point that drives users to pirated versions.

If pirating gets worse and the non-compliant user count remains high, Autodesk may not realize the revenue growth it was looking for.

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