A Wide-Moat Firm That Thrives on Complexity

It is now clear that the global economy is in the midst of a difficult and uncertain period, and nobody truly knows how long it will last. Although the notion of an economic recovery seems almost unimaginable in light of the current flurry of depressing financial news, at some point economic conditions are bound to improve. Therefore, we think this is a good time for long-term investors to focus on a certain software company that possesses what we call a wide economic moat, or a superb competitive advantage:  Autodesk (ADSK).

Autodesk creates and commercializes a wide range of computer-aided design (CAD) solutions. In a nutshell, the firm's applications enable its clients, which range from single-person firms to large multinational corporations, to digitally create, analyze, and manage product and project designs. The value behind Autodesk's applications is simple: Clients save money by creating better, faster, and cheaper products. Although many people still think of Autodesk's applications as being limited to designing cars and bulky machinery, a host of new industries have embraced the benefits of digital design. Nowadays, organizations around the world employ Autodesk's software to design anything from golf clubs to artery stents to skyscrapers.

Because of the worldwide financial crisis, Autodesk has experienced lower business activity during the last few quarters as clients delay new projects. Despite near-term weak results, we believe Autodesk remains well-positioned not only to endure, but also to emerge from these uncertain times stronger and more competitive than ever. This is particularly the case because new products and projects are only becoming more complex; think of the latest multifaceted electronic product you bought or the numerous intricate considerations surrounding the design of a new building (such as energy consumption, regulatory compliance, aesthetics, and structural analysis).

Autodesk's high levels of return on invested capital during the last nine years, as shown in the table below, reflect the company's strong competitive advantages.

We can use Michael Porter's Five Forces as a framework to analyze a company's moat, and Autodesk scores well on each of the five forces.

Low Threat of New Entrants
Autodesk has become the de facto standard in digital design because of its early presence in the CAD industry, a large base of around 9 million CAD end users, and a wide portfolio of industry-specific solutions. To compete, rivals have to make their products compatible with Autodesk's software. This further reinforces Autodesk's advantage and allows the firm to reap the benefits of positive network effects.

The firm's wide moat is also protected by its clients' high switching costs: Operational disruption and downtime costs discourage companies from changing CAD providers. In addition, it takes time to learn a new CAD application. More than 2 million students learn to use Autodesk's applications every year while in college. End-users tend to become skilled at Autodesk's products because it increases the marketability of their skills to potential employers. Similarly, employers take into account the availability of trained employees when considering the CAD solutions to adopt. This self-reinforcing condition works to the favor of Autodesk, in our opinion. To sustain this element of its competitive advantage, Autodesk actively provides educational institutions and instructors with its software, so future users can get a head start in understanding its tools. In fact, the company actively sponsors education programs that combine Autodesk's solutions with math, science, and arts courses. 

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