Was Autodesk a bubble stock?

Today Autodesk became the last of the large publicly traded engineering software companies to announce its earnings. Whereas Autodesk had been a sales and profit leader during the run-up to the financial bubble that burst in 2008, its sales have fallen faster than its peers in the past 12 months. What's going on?

 

Autodesk differs from the aforementioned competitors in that it sells a higher volume of software products at relatively low prices. Generally there is safety in having large numbers of customers, but in Autodesk's case, the reverse appears to be true. Because Autodesk's products are cheap and used for relatively unimportant tasks, such as drafting, customers can get by without upgrading them or renewing their subscriptions during tough times. In contrast, the products of Dassault Systèmes and Parametric Technology are critical to new-product development. So their customers are more likely to continue paying maintenance fees during recessions. Ansys' products are used by even more highly skilled workers (and in fewer numbers) so the pressure to cut the Ansys bill is even lower.

 

Autodesk still derives half its revenue (and most of its profits) from AutoCAD and its derivatives. AutoCAD is a 28-year-old product originally developed for mechanical drafting. Developing what was essentially a word-processor for drawings was a good business in the 1980s, but when 3D CAD began capturing engineers' imaginations in the 1990s, Autodesk's revenue stagnated. From 1998 to 2003, Autodesk's revenues cycled in a range between $750 million and $950 million annually. Then they took off along with the largest real-estate bubble in history. 

 

Autodesk sells more than half its software to people who design buildings, roads, subdivisions, etc. In contrast, its sales to manufacturing companies brought in just 25 percent of its revenues in the most recent 4 quarters. It's not surprising that Autodesk's revenues began to swell with the housing bubble. 

 

Autodesk attributed this growth to new products, such as its Revit software for 3D building design and Inventor for 3D design of manufactured products. But now that the recession has taken hold, we can see that products such as Inventor don't engender much customer loyalty. Inventor unit sales plunged from 17,000 per quarter in January 2007 to 6,100 per quarter in January 2008. Since then, Autodesk hasn't bothered to report Inventor unit sales. And revenues of Autodesk's manufacturing software division fell from a record of $131 million per quarter in July 2008 to $90 million in the current quarter despite the significant acquisitions of Moldflow and Algor.

Autodesk has a huge customer base and when the economy recovers, so will its sales and profits. However, it appears that much of Autodesk's recent growth history may be due to the speculative bubble in real estate. The growth spurt that Autodesk displayed from 2003 to 2008 may not be sustainable.