Intuit Has Incredible Potential Once Acquisitions Pay Off
Intuit Inc. (NASDAQ:INTU) is an American financial software company that specializes in the development of financial, accounting and tax preparation software for small businesses, accountants and individuals. It's well known for its legacy products such as QuickBooks and TurboTax.
Intuit was founded in 1983 by Scott Cook and Tom Proulx in Palo Alto, California. The idea for Intuit came about after Cook realized that personal computers would change the way people did personal accounting. Intuit went public in 1993,
In recent years, the company has been expanding its product portfolio through acquisitions, most notably MailChimp and CreditKarma. However, they haven't actually grown the bottom line much so far, resulting in an inflated valuation. I believe it's only a matter of time before Intuit's acquisitions really pay off, though, because said acquisitions help to reinforce the company's competitive advantages.
Product offerings
First, let's take a look at Intuit's core products, both legacy and acquired. Starting with legacy, QuickBooks is a comprehensive accounting software package geared towards small and medium-sized businesses. It offers on-premises accounting applications as well as cloud-based versions that accept business payments, manage and pay bills and perform payroll functions.
TurboTax, acquired way back in 1993 so it's borderline a legacy product, is a software package for American tax preparation. It's one of the most popular income tax preparation software packages in the United States, with versions for both individual consumers and professional tax preparers.
Mint is a free web-based personal financial management service for the U.S. and Canada. Mint brings all financial accounts together online or on your mobile device, automatically categorizes transactions, lets you set budgets and helps you achieve your savings goals. Intuit acquired Mint in 2009 for a reported $170 million.
On the recent acquisition side, Credit Karma is a financial technology company offering a suite of personal finance tools and services. The platform provides users with free access to their credit scores and reports, credit monitoring services, personalized financial product recommendations and a free online tax filing service. It also offers a high-yield savings account and a variety of educational resources on credit, loans and personal finance. Intuit paid roughly $7.1 billion in cash and stock for the company in 2020.
Another recent acquisition, MailChimp started as an email marketing service and platform and has since expanded its offerings to provide a complete marketing platform for small businesses. Its services now include not only email marketing but also social media and digital ads, landing pages, customer relationship management tools and analytics. Intuit bought MailChimp for approximately $12 billion - half cash, half stock - in 2021.
In the last few years alone, the company has added more than $12 billion in goodwill and more than $6 billion in long-term debt to its balance sheet. The underperformance of CreditKarma is likely to curtail earnings growth in the upcoming quarters with the revenue excepted to decline by more than 10% in 2023. The consumer financial platform made up to 14% of the total fiscal 2022 revenue in its first full year. At MailChimp, revenue was $800 million in 2022, accounting for 5.8% of Intuits top line.
Collectively, I believe Intuit paid too much for both of these businesses in a pandemic-driven buying frenzy, but only time will tell if their competitive advantages will outweigh the high cost.
Legacy offerings remain strong
The TurboTax franchise, a significant revenue driver for Intuit, is projected to have a 10% increase in earnings per share during the tax season. The unit's continual sales gains over recent years can be attributed to a better live assistance experience.
More importantly, the future still looks extremely promising at Intuit's self-employed and small business segment. The company emains committed to innovating and enhancing functionality around QuickBooks, which generates a little more than half of Intuit's revenue. These improvements are aimed at efficiency of small businesses. Further enhancements to working capital management tools, including superior invoicing, bill payments and automation, are also contributing to sales growth.
QuickBooks Online now has 4.5 million users and has an estimated market share of nearly 80% for small businesses utilizing financial software as well as a 79% retention rate, according to Morningstar.
High switching costs associated with QuickBooks helps Intuit keep these users, whether theyre happy or not. Changing accounting software means re-establishing third-party services and re-linking point-of-sale application with bookkeeping software, integrating payroll data and even re-training.
With QuickBooks being compatible with nearly 700 applications, plus having the capital to continue improving regardless of new competition, its dominance seems very durable.
High valuation, incredible value creation
Intuit's stock is trading at a forward rice-earnings ratio of 27, which is a little on the high side, but that's understandable due to the company's high profitability and top-line growth. The gross margin is 79%, the three-year revenue per share growth rate is 20.4% and the three-year earnings per share growth rate is 7.3%. Sometimes, investors have to pay up for quality, and since I expect the bottom line to eventually catch up with the top line growth following the acquisition spree, the stock could become even hotter in the coming years.
Growth has been fairly consistent in the long-term as well. Through the past decade, total annual revenue at Intuit has increased from $3.9 billion to more than $13.6 billion. During that decade of growth, net income grew as well, albeit slightly less, from $858 million to over $1.9 billion. Intuit saw a rise of $104 billion in market value on just $8 billion in retained earnings.
With the companys latest acquisitions set to eventually bear fruit and its legacy products looking to retain high market share for decades to come, I would be shocked if the company doesn't continue to produce $13 in market value for every $1 it retains.
However, lets say this ratio is cut in half and in the next decade Intuit only grows net profit at the same 8.5% annualized rate as it did over the last decade. It would add north of $18 billion in retained earnings to its books, which could translate into an additional $115 billion in market value.
This article first appeared on GuruFocus.
