Intuit: Ready to take the next step

Intuit helps consumers and small businesses prosper by providing financial management, compliance, and marketing products and services. Thus, I believe that their products will continue to be in high demand for many years to come. Intuit has acquired Credit Karma and Mailchimp in the last couple of years, with the aim of taking their business to the next level. Does this mean that now is the time to buy Intuit shares? This is what I will investigate in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Intuit. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. You can purchase Intuit's shares or fractional shares on eToro. eToro is a highly user-friendly platform that allows you to get started with as little as $50.

Intuit was founded in 1983 in California, United States. It is an American business software company that specializes in financial software. Intuit may not ring a bell, but they are well-known for their applications such as TurboTax, a tax preparation software, QuickBooks, a small business accounting program, Credit Karma, a credit monitoring service, and Mailchimp, an email marketing platform. Intuit organizes its business into four segments. Small Business and Self Employed (approximately 56% of revenue) includes a range of services such as financial and business management online services and desktop software, payroll solutions, time tracking, merchant payment processing, bill pay solutions, checking accounts, and marketing tools. These services are offered through QuickBooks and Mailchimp. Consumer (approximately 29% of revenue) offers do-it-yourself and assisted TurboTax income tax preparation products and services. Credit Karma, which accounts for approximately 11% of revenue, offers a personal finance platform. This platform provides personalized recommendations for credit cards, home and auto loans, personal loans, and insurance products. Additionally, it offers online savings and checking accounts, as well as access to credit scores and reports. ProTax (approximately 4% of revenue) serves professional accountants in the U.S. and Canada. Intuit makes the majority of its revenue in the United States, as 92% of its revenue is generated in the United States. I believe that Intuit has a competitive advantage because their platform remains critical to their customers' success, and customers continue to adopt multiple offerings across the Intuit platform to manage their business. It makes me believe that customers trust Intuit, while it can also be difficult for customers to switch to a competitor. It gives Intuit both a brand and a switching moat.

Their CEO is Sasan Goodarzi. He joined Intuit in 2009 and held various leadership positions until he became the CEO in 2019. Prior to joining Intuit, Sasan Goodarzi held various leadership positions at Invensys and Honeywell. He also served as the CEO and co-founder of Lazer Cables Inc. He earned his bachelor's degree in electrical engineering from the University of Central Florida and a master's degree in business administration from the Kellogg School of Management at Northwestern University. He also sits on the Board of Directors at Intuit and Atlassian. Under his leadership, Intuit has taken the first steps to elevate the business to the next level by acquiring Credit Karma in 2020 and Mailchimp in 2021. Sasan Goodarzi recently talked about how these acquisitions will help transform Intuit. In an interview, he stated, "We were a company focused on tax and accounting, a platform company, but focused on solving those two fundamental problems. And we wanted to be a company that helped firms make ends meet, helped you save money, helped you get out of debt, and succeed as a small business." I believe this captures his great aspirations for the company. Furthermore, Sasan Goodarzi has succeeded in developing a great culture at Intuit. Intuit has been recognized as one of the best 100 companies to work for by Fortune, listed on Glassdoor's best places to work in 2023, and acknowledged as one of the best managed companies by the Wall Street Journal. I believe that Sasan Goodarzi's experience, aspirations, and focus on creating a great working culture make him the right person to lead Intuit moving forward.

I believe that Intuit has a strong moat. I also have great confidence in the management. Now, let us investigate the numbers to determine if Intuit meets our criteria for having a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. Intuit has consistently delivered a high return on invested capital (ROIC). They have achieved a ROIC above 10% in nine out of the past ten years. It is slightly concerning that ROIC has significantly decreased since 2019. However, I believe there are several reasons why ROIC has decreased. Some of these factors have also negatively impacted other companies, such as the pandemic and macroeconomic challenges. Furthermore, Intuit has also acquired both Credit Karma and Mailchimp, and it will take some time to integrate these acquisitions into the business. So, while I don't like that ROIC has decreased over the past years, I'm not overly concerned as I believe there is an explanation for the decrease. However, I would like to see an increase in ROIC moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers look good from 2017 onwards, as the equity has increased every year. There has been a significant increase in fiscal year 2021 due to the acquisition of Credit Karma, and in fiscal year 2022 due to the acquisition of Mailchimp. It is nice to see that Intuit managed to grow its equity in 2023, which indicates that the trend of increasing equity will continue.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. It is not surprising to see that Intuit has had positive free cash flow in all years. Free cash flow has been growing every year since 2017, even in a challenging fiscal year 2023, which is very encouraging to see. Levered free cash flow margin has consistently been high, and it is impressive that Intuit managed to deliver one of its highest levered free cash flow margins in ten years in a challenging fiscal 2023. Free cash flow yield is relatively low, indicating that the shares are not trading at a discounted price. However, we will discuss this further in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has a manageable debt that can be repaid within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. After performing the calculation on Intuit, I have determined that the company has a debt-to-earnings ratio of 2,57 years, which is below the limit of 3 years. Hence, debt is not an issue for Intuit.

Like any other investment, there are risks associated with investing in Intuit. One risk is competition. In their annual report, Intuit mentions that they face intense competition in all aspects of their businesses across all markets for their rapidly evolving, fragmented products and services, which have complex interdependencies with many other businesses. Competitive pressures in many of the markets that Intuit serves have significantly increased over the past few years, and management anticipates this trend to persist. Hence, competition could result in a decrease in customer demand for Intuit's products or services and/or lower prices. Macroeconomics. Management has mentioned that small businesses are facing challenges in this economic environment, as evidenced by the fact that their cash reserves are only 90% of what they were this time last year. Furthermore, credit scores for small businesses have decreased by 13 points, indicating that they are facing macroeconomic challenges. Small Business and Self-Employed are Intuit's largest segment by a large margin. If small businesses have less cash to spend, it will have an impact on Intuit. Credit Karma. Intuit is still in the process of integrating Credit Karma into its business. Although the management remains optimistic about Credit Karma, it is not reflected in the numbers. Credit Karma also suffers from macroeconomic factors, but it is disappointing to see that Credit Karma's revenue declined by 9% in fiscal year 2023. And management believes that revenue may continue to decline in fiscal 2024, as they project a growth range of -3% to 3% in revenue for that year. Credit Karma is also the business segment with the lowest margins. In fiscal year, its operating margins were only 26%, compared to 56% for Small Business and Self Employed, 65% for Consumers, and 70% for ProTax.

There are also numerous reasons to invest in Intuit. A large addressable market. Intuit believes that their total addressable market can be worth $300 billion, which means there is plenty of room to grow as Intuit currently generates $14 billion in revenue. They have a clear strategy to reach this $300 billion market. First, they aim to grow their core business by increasing market penetration and expanding their share of the market. It could be achieved through the integration of Credit Karma and another one of their applications, TurboTax. Second, the goal is to connect the ecosystem by linking existing small businesses and consumers to other Intuit products, such as payments, payroll, and marketing tools for business, and financial products like credit cards, loans, and insurance for consumers. Thirdly, expand globally to countries such as Canada, the UK, and Australia. Artificial Intelligence (AI). Intuit wants to become an AI-driven expert platform as it will not only result in introducing innovations at an accelerated rate, but also increase customer satisfaction. Intuit has every opportunity to become an AI-driven platform because of the vast amount of data from their customers. This means they will be able to use the data to fine-tune their own financial language models. If Intuit manages to leverage the data they have, it will result in an increased competitive advantage and make Intuit's products more cost-effective. This, in turn, will lead to higher profitability. Increasing margins. Intuit has successfully increased the margins of their two largest segments, Small Business and Self-Employed, as well as Consumers. They have also provided guidance for margin expansion in fiscal year 2024, despite the uncertain macroeconomic environment. And management has mentioned that they see plenty of potential for them to continue operating in line with their financial principles, which involves growing expenses at a slower rate than revenue. This implies a potential expansion of profit margins. Some of the reasons for the management's optimism are that they aim to become an AI-driven expert platform, and they are transitioning their customers from a license-based desktop offering to a recurring subscription model.

Now it is time to calculate the price of shares in Intuit. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 8,42, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 13%. (Management expects EPS to grow between 11% and 15%). Additionally, I have chosen a projected future P/E ratio of 26, which is twice the growth rate. This decision is based on the fact that Intuit has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $183,69. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Intuit at a price of $91,85 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 5.046 and capital expenditures were 260. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 182 in our calculations. The tax provision was 605. We have 280,421 outstanding shares. Hence, the calculation will be as follows: (5.046 – 182 + 605) / 280,421 x 10 = $195,03 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Intuit's Free Cash Flow Per Share at $17,27 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $248,96.

I believe that Intuit is a great company with excellent management. Intuit has developed two moats, making it a great business. ROIC has not been good in the past three to four years, but I believe there is an explanation for that. Thus, I'm not overly concerned about the low ROIC. I believe that there is some uncertainty regarding how macroeconomic factors will affect small businesses, and if we experience a prolonged recession, it could negatively impact Intuit. Competition will always be a risk factor, but Intuit has a strong track record of performance. While it is important to monitor competition, I am not concerned about it. Management is highly optimistic about Credit Karma, but personally, I need to see improved results before I can share the same level of optimism. Especially because margins are much lower than in the other segment. Intuit has plenty of room to grow, and it is encouraging that they have a clear strategy on how to tap into the total addressable market moving forward. I'm very excited about the opportunity in AI. Intuit has a lot of data on their customers, which means they have every opportunity to leverage this data to create a powerful AI platform that can enhance their competitive advantage and boost profitability. I also find it really encouraging that Intuit has managed to increase margins in a challenging macroeconomic environment. I would love to add Intuit to my portfolio, but I will also need a margin of safety. It means that I will buy Intuit shares if they drop to $350, which would give me a 30% discount on the intrinsic value of the Payback Time price.

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