Seeking Alpha

Intuit: Too Rich

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About: Intuit Inc. (INTU)
by: Stone Fox Capital
Stone Fox Capital
Long/short equity, growth at reasonable price, research analyst, Deep Value
Summary

Intuit dipped following disappointing FQ2 guidance.

The company is maintaining yearly growth rates in the 10% range.

Intuit has pulled back on share buybacks as the stock peaks at a forward P/E ratio above 30x.

Intuit (INTU) remains a great financial software innovation company, but the stock has been too rich to own all year. The slightly disappointing FQ1 results further reinforces that the stock isn't worth the premium valuation. The only reason the stock gained following my negative thesis last year was unsustainable multiple expansion.

Intuit Turbotax logo

Image Source: Intuit logo

Shift To Services

For FQ1, Intuit beat analyst estimates with revenues growing about 15%. The major hiccup here was very weak guidance for FQ2 with EPS guidance of ~$1.00 that was way below consensus up at $1.16. The issue related to more marketing spend prior to tax season on the company's new online and live services.

The quarter ending in January is the second most important quarter of the year for Intuit, but investors do need to keep perspective that the quarter ending in April along with the prime tax season typically account for 80% of the annual income.

What really matters is the updated FY20 guidance:

  • Revenue of $7.440 billion to $7.540 billion, growth of 10 to 11 percent.
  • Non-GAAP operating income of $2.515 billion to $2.565 billion, growth of 10 to 12 percent.
  • Non-GAAP diluted earnings per share of $7.50 to $7.60, growth of 11 to 13 percent.

This is where investors need far more from the financial software company. Intuit kept EPS guidance in line with previous numbers of $7.50-7.60, with analysts up at $7.57. Now, the company has to generate an additional $0.15 from the big quarter in order to even match their estimates.

Intuit is making a smart move into accounting and online services, but these offerings have lower margins. Currently, the Services category has 68% gross margins, while Product revenues are virtually all gross profits. Growth via lower gross margins isn't the ideal path for stock gains.

Far Too Rich

Investors need to grasp that Intuit only forecasts revenue, operating income and EPS growth in the 10-13% range after guiding down for FQ2. The stock trades above $260 with an EPS target for this year of only $7.50.

Even using the FY21 EPS target of ~$8.50, the stock trades at ~31.5x those analyst estimates. My analysis last year pegged the forward P/E ratio at 28.6x analyst estimates, and the multiple rose over 10% during the year.

ChartData by YCharts

Investors have no reason to doubt those FY20 estimates or whether Intuit will keep growing revenues at clips above 10+%. The question is why one should invest in a stock valued at a PEG ratio of nearly 3.

The stock has been very expensive for years. My previous research was complaining about an even lower forward P/E ratio, and Intuit did nothing special this year to warrant outsized stock gains.

The problem here is that the company could slightly rein in growth targets and the stock could suddenly collapse 50% and trade at a 15 forward P/E multiple. The market wouldn't suddenly see the stock as a bargain down at $130, and this is the ultimate problem for investors.

Even the company itself doesn't the stock as a bargain since the surge into 2018. Intuit has consistently spent far less on stock buybacks as the stock soared above $150. A dip in the stock might actually provide another opportunity like buying the stock at $100 back around 2016.

ChartData by YCharts

Part of the problem with stock buybacks is the general lack of cash with only a net cash balance of $2 billion. For a stock with a $67 billion market cap, Intuit doesn't have the cash to warrant the current valuation.

Takeaway

The key investor takeaway is that Intuit is far too expensive considering the expensive valuation, limited cash and minimal 10% growth rates. The recommendation is that investors should avoid the stock until the valuation gets more reasonable.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.