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A Wide-Moat Firm That Thrives on Complexity--Page 2

Autodesk has been affected by the economy but should prosper long term.

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Autodesk benefits from the economies of scale inherent to the cost structure of the software industry, with large fixed expenses (mainly research and development) and marginal costs (such as producing an additional copy of software) declining virtually to zero. Moreover, management has honed its ability to successfully identify, acquire, and integrate small companies (usually in the range of $15 million-$50 million). These small firms can provide key technologies that are incorporated into Autodesk's solutions at a marginal cost, as they are spread over a large customer base. We think this acquisition strategy also enables Autodesk to reduce the threat of potential future competitors.

Last, the entry of a new competitor into this niche industry does not represent a significant threat to Autodesk in the near term, in our opinion. Matching Autodesk's technology, scale, and leveraged reseller network of more than 1,700 channel partners--which enables the company to extend its presence to more than 106 countries--would require not only the commitment of a significant financial investment and time, but would also require matching Autodesk's industry expertise and customer relationships that the firm has nurtured over many years. Still, large companies have tried to penetrate into this industry in the past. For instance,  Siemens (SI) acquired UGS (formerly known as Unigraphics), but the results of such acquisitions have so far been negligible within the CAD industry.

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Rafael Garcia does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.