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As the manufacturer of various financial products ranging from TurboTax, QuickBooks, ProConnect, and Mint, Intuit (INTU) captures a lion's share of the financial planning, tax preparation, and payroll market with its intuitive and cost-effective product lines. INTU has remained a Wall Street favorite with overwhelmingly positive coverage. Over the past five years, INTU stock has rocketed 213% in addition to providing investors with a 0.84% dividend yield. With tax season in full swing, investors may gravitate to tax stocks with the hope of realizing a short-term gain. This article will provide my investment thesis on INTU, discussing the company's business strengths, valuation, and overall outlook.
With $6 billion in annual revenues, INTU remains the preeminent player in the tax preparation and consumer/small-business financial service industry. The company exhibits a highly diversified financial product portfolio that caters to small business professionals, do-it-yourself consumers, and tax professionals. The majority of INTU's revenue base is derived from small business owners and consumers. INTU offers business owners various online business management solutions - the most popular of which is QuickBooks, an accounting software suite that enables business owners to accept business payments, manage and pay bills, and execute payroll functions. The company's intuitive and easy-to-use financial management products make the lives of business professionals much easier and precipitate strong customer loyalties. The total number of QuickBooks subscribers has increased dramatically over the years, with the user base nearly doubling between Q1/17 and Q1/19, from 2,153 million to 4,093 million users. INTU's consumer segment also accounts for a large portion of the company's total revenues: INTU's highly popular TurboTax product line enables consumers to easily file their taxes from home, maximize deductions, and talk to live CPA professionals regarding their individualized tax questions. INTU now derives 52% of total revenues from the company's small business segment, 42% from the consumer segment, and the remainder from the company's professional tax segment. INTU's programs have been incredibly popular due to their ease of use, cost-effectiveness, and overwhelming functionality. From an overarching perspective, the tax preparation and financial services segment offers distinct advantages through astronomical margins and stable revenues. The company's tax and business software programs require very limited capital expenditures aside from software updates and marketing/R&D expenditures. INTU's financial products also eliminate many expenses associated with traditional businesses as the company's products are digital, and the hard copy versions are very inexpensive to create and distribute. Furthermore, INTU's revenues are tied to tax preparation and business management needs, which remain an unchanging necessity. In other words, the government will indefinitely collect taxes, complications in the tax code will increase the dependence on tax software, and easy-to-use business management solutions will remain unchanging tailwinds for INTU.
In addition to revenue diversification and inherent business advantages, INTU benefits from strong competitive deterrents arising from high entry and exit barriers as well as the virtuous nature of INTU's tax preparation software. INTU's business model disincentivizes small business owners and consumers from switching to an alternative platform due to the convenience and cost effectiveness of INTU's tax and financial management programs. Consumers have to dedicate a considerable amount of time to input all their financial data into TurboTax, then they have to spend even more time mastering and familiarizing themselves with the program's interface. This makes them highly unlikely to want to switch to a competitor and go through that process all over again. Furthermore, the duality of INTU's business across its consumer/small-business segments and professional accountant segment creates a network effect in which tax professionals integrate QuickBooks and TurboTax into their own business to streamline the return filing process. INTU's products display underlying strengths as a result of their continuity of service and broadened professional integration.
From an investment returns perspective, INTU offers added appeal. The company has sustained continued share price appreciation. The stock has experienced year over year capital appreciation, offering a 213% return over the past five years. In addition to good capital appreciation, INTU offers a dividend yield of 0.83%, and the company has consistently expanded its dividend yield for the past eight years. The payout ratio on the dividend, at 40%, is moderate as well, allowing the company flexibility to increase the yield. Overall, INTU makes for a great investment holding with considerable monetary rewards.
INTU is also well-positioned financially. The company exhibits positive shareholder equity, significant liquidity reserves of $1.9 billion, and a manageable debt load of $425 million. The company debt is overwhelmingly covered by operating cash flows, at 481% coverage, suggesting an easily manageable debt load. However, INTU's formidable business comes at an exorbitant cost. Based on a discounted cash flow analysis, INTU is severely overvalued. The company's current share price of $225 far exceeds the future cash flow value of $127, implying a 44% trading premium. Although I anticipate solid results this tax season, INTU's extreme overvaluation positions the company for substantial downside.
Intuit demonstrates a formidable business awash with strong competitive advantages and sustained operational outperformance. The company is well positioned financially and exhibits a stable revenue outlook. However, in spite of these positive characteristics, INTU furnishes a sell rating due to the stock's extreme overvaluation. Although the stock may trend higher in the interim as we delve further into tax season, the risk-reward ratio becomes increasingly asymmetric. INTU remains a good buy in the event of a pullback.
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Disclaimer: Please note that this is not a solicitation to buy or sell any security. Data is for illustrative purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are not tailored to individual portfolio needs nor investment objectives. The assessment of a given security is based on my own model portfolio, which is presented solely for educational purposes. Yanni Lodato is an individual investor and author, not an investment adviser. Readers should always engage in further research and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or qualified attorney before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.