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What happened

Shares of engineering and design software company Autodesk (ADSK 1.10%) declined by 17.2% in June, according to data provided by S&P Global Market Intelligence. The move comes in a weak month for industrial software companies, with the market rife with worries over rising interest rates' impact on economic growth. Slowing growth is an issue for Autodesk because it makes software for the design-and-build (architecture, engineering, and construction) and design-and-make (manufacturing) end markets. As a result, when its customers see more challenging times ahead, they typically cut back on development spending.

The market speculating that economic growth will slow doesn't mean it will necessarily happen. However, it's understandable if investors sell off Autodesk on these concerns. After all, the company could be seen as at risk due to management lowering expectations for free cash flow (FCF) in recent years. For example, it previously told investors to expect $2.4 billion in FCF in fiscal 2023 (the company's 2023 second quarter will end this July) and investors priced that in with assumptions of more growth to come.

However, back in September, management told investors to expect lower FCF in fiscal 2024 because of a change in how it bills customers resulting in more long-term cash flow with less upfront.

That's fair enough, but Autodesk missed its original FCF forecast for fiscal 2022 of $1.575 billion to $1.65, reporting just $1.48 billion.

Fast-forward to fiscal 2023 (most of which is in calendar 2022), and management shaved its long-held target of $2.4 billion in FCF toward a new range of $2.13 billion to $2.21 billion due to a deteriorating economic environment and adverse foreign exchange movements.

Come the first quarter of fiscal 2023 and management cut fiscal FCF 2023 guidance to a range of $2 billion to $2.08 billion.

Given this recent history of guidance cuts, the market is obviously bracing itself for more of the same in the coming (second quarter of 2023) results.

It's never good news when a company lowers guidance. Still, it's important to keep a clear head and reflect that Autodesk is still an exciting growth business with plenty of long-term growth ahead. Moreover, its current market cap is just $37.8 billion. So even if Autodesk lowers full-year FCF guidance by, say, $200 million to around $1.8 billion, it will trade on a price-to-FCF multiple of 21 times FCF -- an excellent valuation for a growth company.

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Why Shares of Autodesk Slumped in June - The Motley Fool