Venture Capitalist Marc Andreessen once said that “software is eating the world.” Over the previous decade, he has been proven right over and over, as technology takes over every area of our life. But how can investors get in on the long-term software profits? One way is to invest in software giant Autodesk, which sells tools to architects and engineers, among others.

Is Autodesk a company worth owning for a long time? Let’s find out.

Autodesk sells software for people who make things. This includes companies within architecture, construction and engineering, utilities, manufacturing, infrastructure, and entertainment. The majority of its income comes from the first three, specifically with its design software. Its last quarter, 73.6% of its total sales came from these products. Within this sector, Autodesk’s top software are Revit, which aids people in designing and managing buildings, and computer-aided design program AutoCAD.

Its core products should bring in steady profits for Autodesk, but the company has other programs and economic trends that should help grow its operations over the next ten years. For examply, inside manufacturing and engineering, Fusion 360 is expanding and looking to disrupt the sector with a cloud-based approach. It is also price undercutting many of Autodesk’s competitors by sticking to a low annual price of $500 per year (most other software in this sector cost at a few thousand dollars). At the end of the quarter, the offering had 152,000 subscribers. Investors should anticipate this number to increase substantially over the next three years.

There is also political and economic trends that are positively impacting Autodesk’s business. The infrastructure bill in the U.S., which is giving $715 billion to aid water and transportation management (among other things), should increase demand for many of Autodesk’s software programs.

Should you buy?

Autodesk is valued at $64 billion and is expected to get to $1.6 billion in free cash flow this year. This means the company has a forward price to free cash flow (P/FCF) ratio of 40. That is expensive when you compare it to the Nasdaq, whose P/FCF averages under 30. But Autodesk believes it can reach free cash flow of 2.4 billion by next year, which would lower its P/FCF down to 27, which is right around the average.

With the potential of Fusion 360 and AutoDesk’s other products, along with increasing government stimulus helping out, Autodesk could generate more than $2.4 billion in free cash flow five and 10 years from now.

Author: Steven Sinclaire

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