As Path To All-Subscription Model Comes Into View, Autodesk Upgraded

Morgan Stanley's Keith Weiss upgraded shares of Autodesk, Inc. (NASDAQ: ADSK) from Equal Weight to Overweight with a price target boosted from $69 to $115 given the company's now "clear path" to grow.

According to Weiss, Autodesk boasts a dominant positioning inside the Architectural, Engineering and Construction business and few investors denied this fact. But at the same time, investors have been concerned with the company's ability to yield free cash flow off of its core base. The analyst commented that Autodesk's all-subscription business model is "now clear" and is expected to generate multiple avenues to better yield off of the "sticky" customer base and reduce the volatility its earnings.

Well-Communicated Game Plan

The analyst expanded that Autodesk communicated various initiatives to generate more revenue from existing customers and reduce piracy among a 12-million user base not paying at all. Also, the company will offer a lower-priced subscription offering to previously engaged users.

Perhaps more important, Autodesk's newer cloud-based offerings in collaboration, product lifecycle management and construction should offer new markets and generate opportunities of up-selling other products and services.

All in, the analyst believes Autodesk could realize 2.2-million-gross Cloud subscription additions over the coming five years and that more than 90 percent of the company's revenue base will become recurring nature versus just 25 percent in the 2008/2009 recession.

Finally, the analyst's revised price target is based on a conservative forecast of $5 in free cash flow per share by fiscal 2020 and $9 per share by fiscal 2023. Even applying a discount to Autodesk's peers at a 20x EV/FCF multiple and discounting back at 12.5 percent yields a $115 price target, or 30 percent from current levels.

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