Earlier this month I recommended buying a put option on Autodesk (NSDQ: ADSK) on the belief that it was fully valued and ripe for a fall heading into last week’s earnings announcement. At the time of that article (August 18^th) ADSK stock was priced at $63, which equated to roughly negative 3,000 times forward earnings which seemed more than a bit rich to me.

Last week Autodesk reported its second quarter fiscal results which did not disappoint so the stock moved up in price, trading this morning above $68 a share. Although the value of my put option recommendation has declined as a result, I wouldn’t give up on it yet since ADSK is now priced at more than negative 6,000 times forward earnings. Since using multiples of negative earnings is a bit of a mathematical paradox, that also equates to about 300 times forward cash flow, or more than ten times what it was a year ago!

Since 95% of Autodesk stock is owned by institutional investors, its share price is not likely to decline substantially until one or more of them decide to exit the stock. Exactly what that will take is difficult to say, as clearly their devotion to the company is not based on conventional valuation metrics. Autodesk has a book value per share of less than $6, so the vast majority of its share price value must be based on expectations for its future revenue stream since there isn’t much in the way of hard assets to support its current value.

Autodesk is converting to a subscription-based revenue model for its suite of 3-D software products, so comparing revenue and earnings results from prior year periods can be a bit tricky since a big chunk of that revenue was derived from “perpetual” license sales that consisted of a big up-front price tag with no recurring sales revenue afterwards. In that respect Autodesk is making a smart move, and one that should serve them well provided it can do so profitably.

But the fact that company insiders (i.e., directors and officers of Autodesk) have purchased zero stock during the past six months while selling more than 200,000 shares is more than a little disconcerting, since that amount represents nearly a third of all the shares owned by the insiders. If everything is as rosy as the company’s press release indicates, why are company insiders dumping their own stock instead acquiring more of it?

There is also the question of what is a fair multiple to pay for a recurring licensing revenue stream that at this point appears to be marginally profitable within the foreseeable future? The upside to a subscription based revenue model is that you continue to receive income from existing customers every year, but the downside risk is that those same customers have less of a “sunk cost” in that product and can more readily cancel the contract or switch to a competitor with less financial disincentive to do so.

I don’t know if the answers to those questions will materialize before the October expiration date of our put option, but I recommend you resist the temptation to sell it now at a loss since this stock could change direction in a hurry if there is any unexpected bad news. Hold onto the October $60 put until expiration.