Why Autodesk's downgrade is actually a buying opportunity

Key Points

• The stock has been trading in a tightening range for more than two years. 
• Wednesday's downgrade will have hurt, but the dip is already being reversed. 
• Technically, a breakout to the upside is supported if the fundamentals hold steady.

Having traded in a tight, but mostly upwards, trend for the past couple of months, investors in Autodesk Inc NASDAQ: ADSK got a small pre-Thanksgiving surprise last week. And not the good kind. On Wednesday morning, the team at Piper Sandler downgraded the architectural software company to a Neutral rating, having previously had it at Overweight. 

The firm also lowered its price target from $240 to $215, effectively making a statement that it felt shares were fairly valued right where they were. It would have been a surprise for most, given Autodesk's earnings from earlier in the week had been decent. The company beat analyst expectations on the top and bottom lines while showing improving margins. 

Dimmed outlook

However, it was the company's dimming outlook for FY25 growth and margins that did the damage. This considered note of caution forced Piper Sandler and others to rein in their expectations. Mizuho, who already had the stock rated Neutral, maintained that stance but cut their price target to $200 off the back of what they called a "challenging operating environment." 

Shares had traded up towards the top of this year's range in the sessions leading up to the release, so it wouldn't have been unreasonable for investors to have expected a solid beat and a potential breakout. But with the analysts' lackluster outlook and note of caution, shares sank as much as 10% before markets closed for Thanksgiving. 

However, for those of us on the sidelines, there's a strong case to be made that this is actually opening up a solid entry opportunity. First and foremost, neither Piper Sandler nor Mizuho were bearish enough to move the stock to a full Underweight rating. Secondly, considering the stock has been trading sideways for pretty much the past eighteen months, it's not like there's a multi-month rally that needs undoing after the dimmed outlook. 

Buyers on the sidelines

Indeed, though it will always be one of the quieter sessions of the year, Friday's shortened trading hours saw some buying in the hours before the close. In fact, Autodesk shares didn't even re-test Wednesday's low. Indeed, while the downgrade and slashed price targets might have caught the most attention last week, there were other very bullish comments from analysts. 

William Blair, for example, reiterated its Outperform rating on the stock, pointing out that the company's pipeline remains healthy as the Autodesk platform continues to be a market-leading tool. The firm also noted that the company's ability to tap into different markets adds to its resilience, while at the same time, the ongoing push for digitization is setting them up for success in the years ahead.

The team at Citi took a similar stance and reiterated their Buy rating. Though it did rein in its price target from $261 to $243, the company still expects to see high single-digit growth, which could easily become double-digit growth if the macro trends improve. From where shares closed on Friday, that points to an upside of at least 20%. Were Autodesk shares to hit that in the coming weeks, they'd have firmly broken through the upper band of resistance and would be well on their way to undoing the slide that started this time two years ago. 

In fact, it's the prospect of a technical breakout, fueled by the fundamental performance, that most bolsters the case for last week's dip being a buying opportunity. While shares have traded in a tighter and tighter range over the past year, they have a run of higher lows supporting the upward pressure. 

Given the fact that Wednesday's dip was already being eaten into by Friday's close, there was obviously a glut of buyers who weren't wasting an opportunity to pick up some shares on the cheap. Going into this week, let's see if that momentum can continue because if shares can find their way back to $220, things could get interesting.