Autodesk (ADSK) Q2 Earnings Preview and Options Ideas

by Dan August 25, 2016 1:24 pm • Trade Ideas

Event: Autodesk (ADSK) reports their fiscal Q2 results tonight after the close. The options market is implying about a 6% one day post earnings move which is rich to its 4 qtr one day average move 3.5% but essentially in line with the 10 year average move.

Price Action / Technicals: ADSK is up 4.5% on the year, only 3% from its all time highs made in December 2015 and up a whopping 53% from its 52 week lows made in February and 28% from its post Brexit lows in late June.  To state the obvious, the stock has been amazingly volatile with two 50% plus rallies in the last year alone, and one 37% decline from its all time highs:

ADSK 1yr chart from Bloomberg
ADSK 1yr chart from Bloomberg

Taking a slightly longer term view, the stock has almost to a tee held the uptrend that has been in place from its financial crisis in 2009, the stock has good support in the low $50s and no overhead resistance above the mid $60s:

ADSK since 2000 from Bloomberg
ADSK since 2000 from Bloomberg

Back in late September, prior to ADSK’s annual analyst day on Sept 29th, when the stock was very near its 52 week lows in the mid $40s, a Barron’s article stated Autodesk’s Bet on the Cloud Will Generate Big Returns for Shareholders suggested:

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”

So Barron’s, which often takes a lot of crap for their stock picks (see Facebook & Alibaba) nailed it, the stock has in fact rallied 50% since their article, and consensus revenue estimates have come down, from $2.5 billion in fiscal 2016 to $2 billion in the current fiscal year.

Barron’s also highlighted examples of other software compares whose shares have benefited massively from a similar transition to subscription models:

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.

And shares of ADBE are up 30% since this article was written.  

Shares of ADSK are cheap, especially if you consider the potential for earnings and sales declines to trough in fiscal 2017.  The stock trades 7.2x this years expected sales, a slight discount to ADBE at 8.7x (but ADSK has 30% the market cap and sales).

My View Into the Print: the results and guidance of cloud software vendor Workday (WDAY) last night (miss on most metrics), and the stock’s reaction today (up 6%), suggest it would likely take a material miss and guide down for ADSK to decline in line with the implied move considering the company’s business model transition, which investors should be willing to give them a near term pass on.

So whats the trade? 

Options in ADSK are tough for long premium directional strategies, there are NO weeklies, and strikes are $2.5 wide.

If I were inclined to play for a breakout following results, I might target the high $60s in line with the implied move.  Defined risk strategies are tough because the stock is in between the 62.50 and 62.50 call strikes. No matter how one might chose to express such a view, with the stock at $63.70, the Sept 70 calls, bid 52 cents are a sale.  So gun to my head, to play for a breakout I might consider the Sept 62.50 / 70 call spread for $2.75. This trade breaks-even at $65.25, offers a max profit at $70 or above. This is not a great risk reward, despite the spread being $1.20 in the money.

But out of the money call spreads, with a far lower probability of success look much worse. The Sept 65/70 call spread is offered at $1.40, breaks-even at $66.40, up 4.25%, offering a max gain of $3.60 at $70 or higher.  Lower risk, lower probability of success and far greater probability of losing all of the premium at risk.

Lastly, if you were comfortable being put the stock at much lower levels in the event of a sharp sell off, you might consider using October expiration, targeting their Annual Analyst day on Oct 1st.

One trade (vs stock at $63.70) might be to sell the Oct 57.50 put at $1.10 and buy the Oct 65 / 75 call spread for $2.30.  This trade structure would cost $1.20, breaks-even at $66.20, but offers potential profits of $8.80 between $66.20 and $75.  Between $66.20 and 57.50 lose up to $1.20, and worst case scenario put the stock at $57.50, down 10% (plus the $1.20 premium loss).