Starboard Value Sees Value in Autodesk with Necessary Changes
Investment Highlight: Autodesk ($ADSK)
Starboard Value presents a detailed critique of Autodesk, Inc. ($ADSK), emphasizing the need for significant changes due to underperformance, operational inefficiencies, and governance issues.
Business Overview
- Autodesk is a leader in design and engineering software, with a dominant position in architecture, engineering, and construction (AEC) markets.
- The company has a strong subscription-based revenue model, offering predictability and stability.
- Growth opportunities exist in adjacent markets like construction cloud solutions.
Key Issues Identified
- Share Price Underperformance: Autodesk’s stock has underperformed relative to peers consistently over 1, 2, 3, 5, and 7-year periods during the tenure of CEO Andrew Anagnost.
- Missed Financial Targets: Autodesk has failed to meet all Investor Day financial commitments since 2018, impacting credibility.
- Governance Failures: Issues such as misleading disclosures, problematic compensation practices, and poor capital allocation raise concerns.
Market Position
- Strengths: Autodesk holds a leading market position within its core AEC segment, benefiting from high switching costs and entrenched customer workflows.
- Challenges: Despite these strengths, the company has consistently lagged in profitability and growth relative to peers.
Proposed Changes
- Leadership Evaluation: Re-evaluate CEO Andrew Anagnost’s performance and consider new leadership.
- Operational Efficiency: Implement cost reductions, particularly in sales, marketing, and general & administrative expenses, to align with peers.
- Capital Allocation: Improve capital allocation strategies to enhance shareholder value.
Growth Opportunities
- Subscription Revenue: Continued transition to subscription-based models could drive recurring revenue.
- Construction Cloud: Expanding in the construction cloud market represents a significant growth opportunity.
Concerns & Recommendations
- Corporate Governance: Starboard recommends overhauling Autodesk’s compensation practices to better align with long-term shareholder interests and improve accountability.
- Financial Reporting: Address issues highlighted by a recent Audit Committee investigation, which revealed misleading practices aimed at inflating free cash flow and operating margins.
Valuation and Outlook
- Financial Potential: Starboard believes Autodesk could achieve 45%+ adjusted operating margins and $3.4 billion in adjusted EBITDA by FY2027 with the proposed changes.
- Investment Case: Despite current issues, Autodesk is considered a high-quality business with strong fundamentals and the potential for significant value creation if operational and governance issues are addressed.
Conclusion
Starboard Value LP argues that Autodesk’s substantial underperformance and governance failures necessitate urgent change. With the right actions, they believe Autodesk can unlock significant shareholder value, making it an attractive investment opportunity despite recent challenges.
Click here for the full pro investor letter.
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