Usually, Wall Street loves companies that have recurring revenue. That means they get to charge customers on a regular basis, rather than during a single sale. Many tech companies have embraced the model, as it means a steadier source of revenue.
However, shifting to a recurring revenue model can cause some trouble. That’s because some companies have built up other successful models, such as one-time sales or as multi-year contracts that are billed up front.
That latter category applies to Autodesk (ADSK). The software design company may see its free cash flow drop in fiscal 2025 as it shifts to annual billing cycles from up-front contracts.
That short-term concern has sent shares down. They’re not trading at 30 times forward earnings compare to trading as high as 98 times earnings last year.
Earnings are growing rapidly, and revenue is up 9 percent in the past year. When and how the company records a transaction isn’t as important as those overall numbers improving over time.
Action to take: The software company should fare better on a recurring revenue model, as with many other software companies. That should make for steadier returns over time, which the market should reward. Investors should look to accumulate shares at or under current prices.
For traders, Autodesk shares had a sharp reaction to the news. They’re likely to see a quick bounce higher in the coming weeks. The April $210 calls, last going for about $4.30, can see mid-to-high double-digit returns on a strong recovery in shares in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.