A Wide-Moat Firm That Thrives on Complexity--Page 3

Low Bargaining Power of Suppliers
Although Autodesk licenses certain simulation technology for some of its products from  Ansys (ANSS), we believe this provider has little advantage against the company. First, the value of Ansys' own advanced simulation solutions is predicated upon their compatibility with Autodesk's CAD solutions. Therefore, Ansys has little incentive to destabilize this relationship, in our opinion. Second, Autodesk has been acquiring small companies to improve the unique aspects of simulation capabilities of its solutions for specific industries. Although the company's technological prowess relies on the software and engineering skills of its workforce, we believe that the global scale of Autodesk's research-and-development operations minimize its dependency on labor in a specific region.

Rivalry Among Current Competitors
The CAD industry is characterized by stiff competition based on technological features and breadth of solutions, both subject to rapid change. As a result, rivals tend to match each other's technological innovations within a short period. For example, Autodesk and Dassault have each strengthened their respective building-information-management capabilities through the recent acquisitions of several companies. Similarly, to match Parametric's capabilities in the product documentation market, Dassault recently acquired a small provider of such technology.

Some large clients tend to select a CAD platform for the entire development cycle of a product. Therefore, it is very important for CAD vendors to secure the inclusion of their solutions in the early design phase of new products; otherwise, they will have to wait several years before having another opportunity to gain back a customer. Similarly, small customers usually standardize on a single CAD provider. We believe that Autodesk's product prices represent an advantage over the pricier solutions of its competitors. Although the company tends to employ price incentives from time to time, the industry as a whole has not engaged in destructive pricing practices. According to our estimates, Autodesk and Dassault each account for about 25% of the market, whereas Parametric accounts for around 12% of the market in terms of sales.

However, we believe that the number of end users is an important element of future growth because clients tend to select new CAD solutions from vendors with which they are already familiar. For example, Autodesk's user base is about 8 times larger than Parametric's. In this sense, we believe that Autodesk's sizable user base has enabled the company to grow at a faster rate than its closest competitors and will allow the company to continue growing at a faster rate than its competitors in the near term.

In sum, we believe that Autodesk's wide moat is solid and remains supported by high entry barriers, significant power over its base of clients and suppliers, and industry competition that has been, so far, limited to technological innovation. This strong competitive advantage leaves the company well positioned to not only endure the severity of the current economic conditions, but to also reward its long-term investors when the economic conditions improve.

 

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