Chart of the Day – $ADSK: Oh Barron’s

by CC September 30, 2015 2:37 pm • Chart of the Day• Commentary

Talk about the Barron’s Curse. Since the financial rag ran a feature story this past week on the design software maker Autodesk (ADSK) previewing their analyst day Sept 29th, titled (Autodesk’s Bet on the Cloud Will Generate Big Returns for Shareholders), the stock has declined 6%, and is today making a new 52 week low, down 26% on the year, and down 30% from its all time highs made in late February:

ADSK 1 year chart from Bloomberg
ADSK 1 year chart from Bloomberg

On a longer term basis the stock is at a fairly critical technical spot, sitting on the uptrend that it  has been on since the 2009 lows, and below what was a fairly important technical breakout level of $45 in late 2013:

ADSK 7 year chart from Bloomberg
ADSK 7 year chart from Bloomberg

Barron’s suggested the company’s transition to workflow management software for construction sites could cause:  

“The shares could jump 50% in the next 18 months as investors get more comfortable with Autodesk’s transition to the cloud.”

But in the short term, the transition could cause:

“sales could slip 1.1%, to $2.49 billion, for the fiscal year ending in January, as the company trades one-time software purchases for smaller recurring payments.  The decline means Autodesk could lose as much as $258 million in this fiscal year, down from an $82 million profit last year”

Barron’s sites examples of other transitions of software companies to subscription models, quoting JPM’s software analyst Sterling Auty who:

knows the profit spike that can follow the move. He cites Synopsys (SNPS), Cadence Design Systems (CDNS), Aspen Technology (AZPN), and most recently, Adobe Systems (ADBE). “The subscription transition has been a recipe for success if it’s done correctly.”

Shares of Adobe are near record highs, up 154% in the past three years. The company has successfully expanded its user base by offering a seemingly affordable subscription. Photoshop, which used to cost $700, is now part of a $10 monthly package.

ADSK is in the midst of that previously noted profit shift, but also a result of soft end markets in the construction related industries, and of course dealing with the adverse affects of the strong dollar as the company gets about two thirds of their sales from outside the U.S.  While the merits of a business model transition could make a lot of sense, a re-rating of the stock (higher) at this stage of the game seems a bit unlikely, especially when you consider what appears to be increased investor scrutiny on valuation predicated on future sales growth (discussed earlier in WDAY post here).

Much like WDAY, we could see a nasty breakdown in a more volatile market as there is little valuation support and uncertainty regarding their business model transition.  A rally back towards its recent breakdown level at $50 which also corresponds with the stock’s declining 50 day moving average would be a great short entry.  That said, if you thought that was going to happen $44.15 could be a great long entry 🙂  Thanks to Barron’s for putting the stock on a our radar.  We obviously don’t think its a great press on the short side, but we can’t come up with any reasons to try to catch a falling knife either.