TRADE INSTRUCTIONS

Date: May 22, 2018
Name: Autodesk
Symbol (Exchange): ADSK (NasdaqGS)
Type: Long put option to open
Expiration: June 1, 2018
Strike Price: 137.00
Limit: Buy below $5
Symbol: ADSK180601P00137000

TRADE RATIONALE       

Autodesk, a manufacturer of 3D software design tools, is scheduled to release Q1 results this Thursday after the market close (5:00 p.m. EST). This trade is a bet that the long-awaited transition to profitability will be achieved, but will be accompanied by forward guidance intended to temper expectations for the remainder of the year due to compliance with ASC 606 (explained below).

First, you have to wonder why the company chose to release earnings the day before the extended Memorial Day weekend. If the numbers and guidance are going to be stronger than expected, then moving the announcement up a day or two would give traders on Wall Street more time to drive up the share price before taking off for their beach houses in the Hamptons the next day.

More importantly, so much hype is already priced into the stock that anything short of a blowout quarter could quickly push the stock down to where it was trading before it released year-end results three months ago, which is below $120 (there is support at $123, but breakeven is at $132 so a drop to $127 would represent a 100% gain on this option if purchased at our limit price). 

Lost in the excitement surrounding those results was this statement appended to the end of the document:

“Starting with the first quarter of fiscal 2019, Autodesk is adopting the new revenue accounting standard, ASC 606.

• We will be applying the modified retrospective transition method.
• We do not believe the new standard will result in a change in timing or amount of the recognition of revenue for the majority of our product subscription offerings and enterprise agreements.
• We will be required to capitalize and amortize sales commissions under the new standard.
• We do not expect a significant impact on reported expenses for the full fiscal year, however, the timing of when we recognize the deferred commissions by quarter will vary compared to our historical seasonality.
• None of the ASC 606 impacts affect cash flow.“

Although the company states that adoption of ASC 606 will have a material impact on revenue recognition or cash flow, many companies that have transitioned to ASC 606 have had to restate earnings downward by a larger degree than analysts expected.

So far, the company’s saving grace is the fact that 99% of its outstanding shares are owned by institutions, scaring away short sellers that require an exit strategy. Five of its top ten mutual fund holders are index funds, which has worked in its favor as its share price has appreciated nearly 40% since bottoming out three months ago.

Those funds must buy more of the stock to retain its relative weighting in the index. However, that degree of sponsorship by index funds can also compound losses when its share price starts heading the other way.

Note: For those of you using Dr. Leeb’s “3 Pot” system, this is a Pot 3 trade (i.e., “house money”). That means don’t bet the ranch since this option expires in ten days.