Shares of Autodesk (NASDAQ: ADSK) slipped by as much as 10% this week, according to data from S&P Global Market Intelligence. The software giant delayed its annual report filing with the Securities and Exchange Commission (SEC) and is currently doing an internal investigation of its accounting practices. Investors do not like any uncertainty around accounting mishaps and were likely spooked by this news.
Autodesk stock is currently down 7.7% year to date while the broad market is soaring.
On April 16, Autodesk notified shareholders that it would be delaying its annual report filing, which is unusual for a company of its size. Currently, Autodesk has a market cap of $46 billion. The reason? It is still performing an internal investigation around its free-cash-flow and non-GAAP (adjusted) operating margin practices. While it is unclear whether anything will come from this investigation, investors do not like these developments. Free cash flow and profit margin are key metrics that shareholders follow. If Autodesk has been misstating these numbers, that could indicate a major problem with the business.
Even if the numbers are correct, Autodesk has struggled to expand its margins in recent years. Management has promised it can expand its profit margins to the 30% to 40% range due to the high gross margins of its software products. However, its bottom-line operating margin has stayed around 20% for the last few years. A similar company, Adobe, has margins in the 35% range, which is what investors expected Autodesk to achieve.
Even though Autodesk has underperformed the market, its stock still looks expensive with a price-to-earnings ratio (P/E) above 50. Investors may have been betting that it would see a profit inflection if margins could get closer to peers, but that has not happened over the last few years. Instead, revenue has grown while margins stagnate.
Now, the company is investigating itself over its accounting practices, another poor sign. Autodesk may consistently grow its revenue, but it is not turning incremental sales into profits. With a high P/E, investors should stay away from Autodesk, especially with the uncertainty over its accounting statements.
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Brett Schafer has positions in Autodesk. The Motley Fool has positions in and recommends Adobe and Autodesk. The Motley Fool has a disclosure policy.
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