Autodesk stock forms a risky double-top pattern ahead of earnings

Autodesk (NASDAQ: ADSK) stock price has recovered modestly in the past few weeks as investors focus on its quarterly financial results scheduled for Aug. 29. 

The stock initially tumbled to a low of $195.55 a few months ago after it highlighted accounting issues and started a probe that led to the ouster of the Chief Financial Officer (CFO).

It has now bounced back by over 31% from its lowest point this year as investors remain confident in its accounting and execution. Starboard Value, a popular activist investor, is pushing for the ouster of Andrew Anagnost, the Chief Executive Officer (CEO).

A crucial SaaS company

Autodesk is not a mainstream company since it does not sell its products to retail customers. However, it is one of the core software company that is known by most architects and engineers. 

AutoCAD, its most popular software, is used by architects to create designs and renders. It costs $ 2,030 a year. It also sells other software like AutoCAD Lite, Fusion, Revit, and Civil 3D. 

Autodesk benefits from three key factors. First, while the industry is highly competitive, it has a leading market share among architects, engineers, and academic institutions.

Second, these customers typically don’t change their software provider because of the learning curve. In other words, since most people were trained using Autodesk’s solutions, moving to other services will require some training. 

Third, the company benefits from the ongoing trend of platformisation and upsell. In platformisation, companies are moving to one provider. In Autodesk’s case, the company offers numerous products and it is common for clients to subscribe to two or more of them. 

For example, an AutoCAD customer will likely buy InfraWorks, which is used in the design visualization and analysis, especially in road, bridge, and drainage.

To a large extent, Autodesk can be compared to other software companies like Microsoft and Adobe. While these companies face substantial competition, they have maintained their market share over time. 

Autodesk is growing gradually

The main challenge that Autodesk faces is that it is difficult to add more large customers since most architectural companies are already clients. 

Still, the company has continued to grow its revenues. Its annual revenue moved from over $3.27 billion in 2010 to over $5.4 billion last year, representing a 68% growth rate. 

What is unclear, however, is whether the company has more room to grow in the coming years. The average analyst estimates that its revenue will hit $6.05 billion this year followed by $6.7 billion in 2025. 

Analysts also expect that its earnings per share (EPS) will move from $7.6 in 2023 to $8.12 billion and $9.04 in 2024 and 2025, respectively. Autodesk has a good record of beating analysts estimates, meaning that its growth will be much better.

The other important aspect in Autodesk’s business is that it has some of the best gross margins in the sector. Its gross profit margin stands at over 91.7%, higher than Adobe’s 88%, ServiceNow’s 79%, and Microsoft’s 69%.

Its challenge, however, has been how to transform its gross margins into net profit, which is the most important aspect in a business. For example, Microsoft has a net profit margin of 35% while Adobe has 24%. Autodesk’s net income margin is 17%, meaning that it has more room to improve. 

Autodesk earnings ahead

The next important catalyst for the Autodesk share price is its financial results. In its Q1 numbers, the company said that its revenue rose by 12% to $1.42 billion while its operation margin rose by 21%. 

Most of this revenue was in its design business whose revenue rose by 10% to $1.2 billion followed by subscription, which made $1.33 billion. 

Analysts expect these results to show that its revenue rose to $1.48 billion in the last quarter, up from $1.38 billion in the same period last year. Based on its historic performance, the company will likely do better than estimates. Its guidance was revenues to be between $1.47 billion and $1.49 billion. 

The management will likely use the earnings report to provide more information about its accounting issues. A few days ago, Bloomberg reported that the company was aware of accounting issues for a long time.

Autodesk stock price forecast

The daily chart shows that the ADSK share price has been in a strong bull run in the past few weeks. It has moved from a low of $195 in June to $255. Most notably, the stock is sitting at a key point since it was its highest swing on July 17. This is a sign that it has formed a double-top pattern.

The stock formed a golden cross pattern as the 200-day and 50-day moving averages in June. Therefore, because of the double top, there is a risk that it will retreat after earnings. If this happens, the next key point to watch will be at $245.