Morgan Stanley Downgrades Autodesk Amid Belief 'Successful Transition Largely Priced In'

• Autodesk, Inc. ADSK shares have gained 23 percent in a month, rising from a low of $50.96 on October 12.
• Morgan Stanley’s Keith Weiss downgraded the rating on the company from Overweight to Equal-weight, with a price target of $68.
• Following the recent appreciation, shares already reflect the company’s successful transition, leaving less than 10 percent upside to the base case scenario, Weiss mentioned.

Analyst Keith Weiss said Autodesk is going through a prolonged subscription transition, and its earnings and cash flow could be modest in the near term. He added, “Autodesk investors need to take a view on what the company can earn through FY22.”

Weiss mentioned the following scenarios:
Base Case – “Running the Gauntlet, Smooth Transition to Subscriptions.” New product widens the customer base, while selling well among existing customers, and converting maintenance paying customers to desktop subscription customers. Autodesk could ramp to a base of 6.8M subscriptions by FY22, with expenses growing at a 5.5 percent CAGR. FCF per share of $6.47. Share value of $68.
Bull Case – “Subscription Base Builds Ahead of Plan.” New products receive greater acceptance, backed by a stronger global environment. A faster subscription transition takes the base to 7.25M in FY22, while expenses remain in check at 5 percent CAGR. FCF of $7.88 per share. Share value of $100.
Bear Case – “Macro Gets in the Way, Bump on the Path to 6.8M Subs.” The company faces the risk of mild recession halfway through the transition, which “pushes out the FY20 goal posts by two years as subscription acquisition CAGR slows.” CFC of $4.18 per share in FY22. Share value of $25.

"While speculation on the potential for more aggressive cost-cutting measures being put into placelikely creates downside protection for the shares, with less than 10% upsideto our basecase, weare moving to an Equal-weight rating," Weiss wrote.