Autodesk Inc.'s shares jumped Friday after the design software company said that it is shifting its revenue model and a B. Riley analyst upgraded the stock.
THE SPARK: Analyst Dan Cummings upgraded his rating on the company's shares to "Buy" from "Neutral" and raised his price target to $42 from $38.50 following its most recent quarterly report and indications from management that the company will be shifting to a subscription-based revenue model.
THE BIG PICTURE: Autodesk, known best for its AutoCAD design software, reported late Thursday that its second-quarter net income fell 4 percent and it forecast disappointing results for the third quarter. Its second-quarter adjusted results and revenue beat estimates. While the weak forecast sent shares down in after-hours trading following the report, the path changed the next day.
Cummings said that on a call with investors, management said that its shift to a subscription-based revenue model is just ahead. The company is expected to unveil details on Oct. 2 when it will hold an investor meeting.
A number of software companies are trying to shift to subscription-based services, which essentially let users rent access to software rather than buy packages for installation on their computers.
Autodesk, of San Rafael, Calif., develops computer-aided manufacturing software used by designers, engineers in industries such as manufacturing, architecture, building and construction. It's also used in digital entertainment, such as visual effects in movies.
THE ANALYSIS: The B. Riley analyst said that the company showed some gains in major accounts and emerging markets during the most recent quarter, which he believes can translate into better results in the near term.
He also believes that the company's business model is likely to strengthen, in terms of product appeal to customers and management's visibility into near-term results.
Citi Investment Research analyst Walter Pritchard said separately that the company's stock will like trade higher ahead of the Oct. 2 meeting, whether it makes sense or not. He believes investors will be cheered by the concept of a business model transition, which may cause them to ignore its deteriorating fundamentals, evidenced in its weak guidance. He has a "Neutral" rating on the company's stock.
SHARE ACTION: Shares of Autodesk jumped 10 percent, or $3.61, to $39.74 in afternoon trading. Its stock hit as high as $41.72 earlier in the day - marking its highest trading level for the year. The company's shares were one of the top gainers in the S&P 500 index Friday.