A Deep Analysis Of Intuit

Jun. 24, 2020 10:56 AM ETIntuit Inc. (INTU)BCOR, HRB, SGPYY, TRI, XROLF27 Comments17 Likes


  • Intuit faces serious threats, but, over the long term, the COVID-19 crisis is not one of them.
  • Since its IPO in 1993, the company has outperformed the S&P 500 by a very wide margin.
  • What qualitative and quantitative factors explain Intuit's outstanding performance?
  • Will such factors persist in the future or is the company slowly declining?
  • And, considering its prospects, is the company attractively priced at the moment?

A Deep Analysis of Intuit - Research on Intuit

Source: Free Commercial Images

Please skip the following introduction if you have read my previous articles.


It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

- Warren Buffett

What is a wonderful company, and what is 'quality merchandise' from an investing standpoint? The most constructive definition to address this question is Warren Buffett's concept of "economic moat", a long-lasting competitive advantage that allows a given company to harvest above-average returns on its capital, even when faced with economic downturns or powerful competitors.

A quality investing strategy should, therefore, capture the fundamental nature of Buffett's philosophy. Here, the aim is to identify high-quality stocks - or "compounders" - trading at reasonable prices by calculating a simple Quality Score based on 12 fundamental factors related to the actual business and its intrinsic economic characteristics. These are (possibly) the qualitative and quantitative factors that best capture the elusive 'quality dimension' of a specific company, at least according to Buffett and other investors in these best-of-breed companies like Charlie Munger, Chuck Akre, and Joel Greenblatt. The intention is not to discuss fleeting quarterly results (far from it) but rather to analyze and find superior companies and business models capable of compounding value for many years into the future. To calculate the Quality Score, the following questions will be addressed:

1) Presence of strong and enduring competitive advantages; 2) Favorable market dynamics and relative positioning; 3) Presence of multiple and complementary sources of revenue; 4) Presence of market leadership; 5) Presence of pricing power; 6) Presence of high and persistent Cash Returns on Invested Capital; 7) Strong cash-generation ability; 8) Presence of superior gross profitability; 9) Presence of superior revenue growth; 10) Absence of systemic and company-specific risk factors with the potential to compromise the firm's future; 11) Presence of a solid financial position, with little debt.

To calculate the Quality Score, one (1) point is awarded when the answer is fundamentally positive ("Yes"); minus one (-1) point is subtracted when the answer is essentially negative ("No"); no points are added or subtracted (0) when there is too much uncertainty or when negative and positive factors are essentially in equilibrium. 'High-quality companies' are the ones with a Quality Score of "6" or above. Let us then calculate the Quality Score for Intuit Inc. (NASDAQ:INTU).

1. Does Intuit have strong and durable competitive advantages over competitors? Yes: 1 Point

One night, some 37 or so years ago, Scott Cook's wife Signe Ostby entered the kitchen and once again went through the hassle of trying to track the couple's finances with good old pen & paper; complaining about the monotony of this time-consuming chore, Ostby told Cook that there should be a way to computerize the financial tasks that every household has to do on a routine basis.

An ambitious Harvard graduate working for Bain & Co., Scott Cook was immediately struck by his wife's words. At long last, he knew what he needed to do to start his own business: he would develop and sell software to replace paper-based accounting with digital-based accounting. But, despite having all sorts of prized skills, he was not much of a programmer.

And so he went to the University of Stanford looking for a more accomplished one. Randomly, while at the campus, he tapped the shoulder of a passing student and asked: "Excuse me, where would be a good place to post these flyers? I'm looking for programmers". Intrigued by Cook's question, the student replied: "Tell me a little bit about what you're looking for…". As it turned out, inspired by Steve Jobs, this computer science student named Tom Proulx also wanted to start his own company. Cook's ensuing explanation entranced young Proulx then and there - and with that, the stage was set for the creation of the company we now know as Intuit.

What set Intuit apart from the very beginning was the founders' obsession with the customer experience. Indeed, Intuit may have been the first company to perform usability tests. The firm's first product (Quicken) became so famous and popular for its ease of use that Intuit saw no reason to spend large sums on sales and advertising. Quicken and the firm's subsequent offerings combined the advantages of pen & paper (simplicity) with the advantages of computerization (precision and speed). Before Quicken, and because of usability constraints, only a few people used financial software for personal purposes.

Scott Cook has always preached that Intuit wins "by creating products that function well and feel good to the senses", and he readily admits that many of the company's best ideas were - and still are - produced by its customers. Still today, through its 'Follow Me Home' program (which includes 10.000 hours of visits to customers each year), Intuit carefully studies the experience of its users to improve existing offerings and anticipate their needs and problems.

Despite ferocious competition from the likes of Microsoft (MSFT), such relentless focus on usefulness and functionality enabled the company to capture 75% of the market by 1997. In turn, the company's dominance and profitability also empowered it to make a string of acquisitions that further bolstered its sales and competitive position over the years.

Intuit's Competitive Advantages | Customer Switching Barriers

Spearheaded by offerings like TurboTax and QuickBooks, the company's solutions are now deeply embedded in the workflow of countless individuals, small businesses, and self-employed customers (and their respective bookkeepers and accountants).

However, despite its popularity, the problem with a professional tool like QuickBooks, for instance, is that it requires time and effort to be fully mastered. Naturally, once the software is mastered, customers become quite reluctant to switch to another provider because of the time it takes to learn how to use a competing application and because of the difficulties associated with transferring accounting records.

Being so, once a business owner has taken pains to implement and learn a new accounting solution, the prospect of repeating the process for anything less than a vastly superior competitor becomes very unattractive, which in turn leads to price tolerance and strong customer captivity.

Moreover, a switch would also bring about the inconvenience of reconnecting the new software with needed apps from third-party developers (such as third-party apps for analytics, time tracking, or expense management). According to Intuit, QuickBooks Online (QBO) is at the center of the largest third-party app ecosystem for accounting software, a fact that extends its appeal to a broader spectrum of established and prospective customers.

Through its 'Education Program', Intuit has been doing an outstanding job at nurturing this switching barrier from an early stage. The program has established partnerships with US and Canadian universities in which thousands of accounting students (and their teachers) receive Intuit's software for free, making these institutions and these future accountants hooked on the company's offerings - naturally, students introduced to the firm's software are much more likely to stick with Intuit once they have used its products and integrated them into their workflows.

The Education Program is, therefore, an effective way to convert accounting students into lifetime users. Moreover, students have a strong incentive to learn how to use Intuit's products (as the industry uses them extensively) and accounting practices also have a strong incentive to continually embrace the firm's software (because new hires arrive with a proficient understanding of Intuit's latest offerings). These initiatives create a virtuous cycle that perpetuates the company's dominance.

Intuit's Competitive Advantages | Network Externalities

QuickBooks's celebrated ease of use must be properly relativized: sure, judging by the time it takes to reach full mastery, QuickBooks is probably easier to master than Autodesk's (ADSK) AutoCAD or ANSYS's (ANSS) CFD software, for instance, but it is also much more difficult to use than Microsoft's Word or other general-purpose software code.

Because of this (and also because accounting can be a difficult subject), many business owners without an accounting background still need to hire an accountant to ensure that Intuit's offerings are used correctly and effectively. Indeed, even with QuickBooks or other similar programs, many business owners still require someone who understands tax and accounting regulations inside-out. Accounting software is not a replacement for accountants.

Besides, advances in society and technology have made sales, marketing, and accounting more complex than ever. As a consequence, many owners also see accountants as trusted advisors on multiple aspects of their businesses (tellingly, about one-third of small businesses place accountants at the top of their list of trusted advisors).

Furthermore, completing tax returns can be a bewildering and labor-intensive task for owners who would rather be focused on their core competencies - being so, hiring an accountant to help not only saves them time, but an accountant may also be able to deal with tax debts, lower the tax exposure and perform many other decisive tasks.

Due to these tight and often unavoidable relationships between accountants and small business operators, there's little incentive for both parties to use software other than the most popular and well-understood solution available in the market (which is QuickBooks); for better or worse, QuickBooks is also the gold standard for small business accounting.

In essence, Intuit provides the most complete matchmaking platform. Based on Intuit's metrics from 2018, QuickBooks users with an accountant are 31% more likely to stay on the platform; in addition, the platform also triples the average number of client leads for accountants. Ultimately, accountants use QuickBooks because business owners use QuickBooks, and business owners use QuickBooks because accountants use QuickBooks. This interdependency, in turn, has created positive network externalities for the benefit of the company.

Such externalities arise in the so-called Platform-mediated Networks (PMNs), which include a specific population of users who need to interact with each other (in this case, accountants and business operators), along with an intermediary (Intuit itself) who provides a given platform (like QuickBooks) that supports the necessary interactions between these users. For users, the value of PMNs increases exponentially but, for providers, the costs of running them increase only linearly. PMNs are often self-reinforcing, too.

Intuit also persuaded the most successful third-party programs to join its ecosystem by promising access to its vast customer base, a fact that again contributes to attract both more customers and third-party developers to Intuit's ecosystem. QuickBooks has thus created a network that became progressively more valuable to its existing users as the number of new customers increased over time.

Because they create barriers to exit (by locking-in its customers), as well as barriers to entry (by making competitors less relevant), such network externalities are one of the most powerful competitive advantages a company can have.

2. Is Intuit a diversified company, with multiple and complementary sources of revenue? Yes: 1 Point

The company has three business units: Consumer, Strategic Partner, and Small Business and Self Employed (SBSE). Each business segment offers products optimized for particular customer needs in accounting, individual tax filing, and professional tax preparation.

The SBSE unit targets self-employed individuals and small to mid-sized businesses, as well as the accounting professionals who serve them. This business accounted for about 52% of the company's sales in 2019. Its flagship offering is QuickBooks, a financial and business management tool with online and desktop versions; the unit also offers payroll solutions, merchant payment processing solutions, and financing for small businesses*.

In addition to the core QuickBooks offering, it also sells an Enterprise solution (designed for businesses with 10-100 employees), a Self-Employed solution (intended specifically for self-employed customers) and solutions for accounting professionals (QB Online Accountants and QB Accountant Desktop Plus).

The SBSE unit competes with a wide variety of private and public companies such as Gusto, FreshBooks, BlueVine, Paychex (PAYX), Microsoft, Automatic Data Processing (ADP), and Global Payments (GPN); however, SBSE's closest competitors among publicly traded companies are Xero (OTCPK:XROLF) and The Sage Group (OTCPK:SGPYY).

Companies (and eventual competitors) like PayPal (PYPL), Square (SQ), and Shopify (SHOP) have online and mobile applications that integrate with QuickBooks' open platform. Currently, the main problem faced by this unit is how to move beyond the accounting niche to provide comprehensive solutions for the entirety of a business, from accounting to payroll, and from financing to taxes.

The Consumer unit offers do-it-yourself and assisted TurboTax income tax preparation products and services to consumers; this unit, which generated 40% of the firm's sales last year, also offers personal financial management services and apps (Turbo and Mint). The company monetizes Mint mainly through lead generation for financial products and the sale of user data. The Consumer business faces competition from private concerns such as TaxSlayer or TaxHawk, and from public companies like Blucora (BCOR) or H&R Block (HRB).

Responsible for 7% of the company's sales, the Strategic Partner unit serves professional accountants in the United States and Canada. It includes offerings like Lacerte, ProSeries, ProFile, and ProConnect Tax Online. Lacerte is designed for accounting firms that handle complex returns, whereas ProSeries is intended for tax practices that handle moderately complex tax returns. ProConnect Tax Online is a cloud-based solution designed for practices that prepare consumer and small business tax returns; this offering integrates with QuickBooks Online. And finally, ProFile is Intuit's Canadian tax offering. The Strategic Partner unit also offers a diversity of services that complement the tax return preparation process, such as document storage and e-signature services. Its largest competitor is Thomson Reuters (TRI).

By integrating distinct solutions offered by Intuit itself and by third-party developers, the three business units form a large and synergistic ecosystem unmatched by the firm's direct rivals. Besides locking-in its customers, such ecosystem allows Intuit to use complementary offerings from different segments to cross-sell distinct services and increase its revenue per user (one example of this cross-selling dynamic is provided by the customers that combine QuickBooks Self-Employed with TurboTax to export and pay year-end taxes).

As explained before, Intuit also benefits mightily from the integration between its customers and their accountants; furthermore, by leveraging its solutions for accounting professionals, the company has convinced accountants to act as 'ambassadors' or 'friendly middlemen' who actively recommend the firm's offerings to their self-employed and small-business clients (tellingly, in the United States, 4 out of 5 accountants recommend QuickBooks to their clients) - of course, besides reinforcing Intuit's brand appeal and positive network externalities, these active recommendations also perpetuate the company's grip on the market.

If there's one criticism that can be made regarding Intuit's sources of revenue, then it's the company's over-reliance on the North American market. Intuit benefits from revenue diversity at the product level but not at the geographic level: for better or worse, and since 90%-95% of its revenue comes from the United States, the company's faith is closely tied to the faith of the small businesses and self-employed individuals in the country. And those are now suffering disproportionately with the COVID-19 crisis.

Moreover, the company's narrow focus on the domestic arena created a large void in international markets that was duly explored by the competition. Its rival Xero, in particular, has made meaningful inroads in several countries across the globe and has positioned itself as one of the main players in Australia, New Zealand, and the United Kingdom. Xero also enjoyed solid growth in South Africa and Southeast Asia. Once the disruptor, Intuit was on the brink of being disrupted by an aggressive upstart from the other side of the world.

* Depending on the credit score and loan amounts, the interest rate charged to small businesses varies between 9% and 19.3% - Intuit can evaluate this risk with great accuracy because the small businesses' financial transactions are coded to the software's general ledger.

3. Is Intuit well protected against systemic and company-specific risks with the potential to severely compromise its future? No: -1 Point

Competitive and Technological Disruption: "You guys are really disrupting Intuit", asserted Clayton Christensen, the late guru of 'disruptive innovation', when praising Xero at a seminar held 6 years ago. Indeed, despite its self-proclaimed culture of innovation, Intuit was caught napping by Xero back in 2011-2012. Sage, the UK's incumbent, was also caught off guard and leaked a significant amount of market share to Xero in the online space.

Founded in New Zealand, Xero started off based on the premise that international markets were underserved and up for grabs; then, as owners around the world started using smartphones to conduct their lives and businesses, Xero seized the opportunity to offer a low-priced mobile app that won over many of those underserved owners. This goes to show that disruptive actions may happen in the blink of an eye in today's world.

Fortunately, Intuit responded fast by turning a once mistreated offering (QuickBooks Online) into a proper rival to Xero - and yes, what allowed Intuit to pivot was indeed its culture of innovation and its ability to self-disrupt. In fact, the company quickly recognized the threat from the pesky upstart and virtually disrupted itself before Xero could do so.

Besides selling Quicken, Intuit also abandoned the idea of offering a closed system and opened up its platform so that other companies could plug their services into it. Still, in countries like the UK, Intuit's average revenue per customer is just above half that of Xero's (Intuit is gaining ground fast, though).

Disruption will probably also arrive from outside the accounting software industry: with their millions of small business customers and appetite to enlarge their product portfolios, capable companies like Shopify, Square (SQ), or Wix (WIX) may one day decide to compete head-on against Intuit.

Expensive Acquisitions: Intuit needs to expand its ecosystem to combat these potential rivals, and the most direct path to gain scale and new functional attributes is to buy companies with promising portfolios. However, M&A deals often destroy shareholder wealth in the acquiring firm; together with the current economic environment, this is one of the reasons why the acquisition of Credit Karma by Intuit should be tempered with a healthy dose of skepticism.

Indeed, despite the enthusiasm shown by some investors, this unicorn won't come cheap: Intuit will disburse USD 7.1 billion in cash and stock to buy it (or 7x Credit Karma's annual sales), making this acquisition the largest in the company's history; moreover, Credit Karma is unlikely to boost Intuit's profit margins over the medium-term. About USD 1 billion of the total purchase price will be earmarked for equity awards that will be expensed over the next few years; once the deal closes, Intuit will then issue about USD 300 million in shares to Credit Karma employees.

These terms are not as unfavorable as they seem at first glance, though, because Intuit is taking advantage of its own higher-priced stock to fund the purchase (INTU is now selling at roughly 10x annual sales). The acquisition also makes some strategic sense, as Intuit can tap Credit Karma's young customer base and wide portfolio of services to synergize and upsell its offerings. It all hinges on execution.

Intuit also intends to create a groundbreaking, artificial-intelligence powered 'digital personalized finance assistant' by leveraging Credit Karma's treasure trove of consumer data (which includes not only financial data but also key behavioral and location data). With the integration of Credit Karma with Mint and QuickBooks, Intuit will have a full picture of what consumers are doing at any given time and location.

Does this ring a bell? Well, a bell should be ringing, because what Intuit wants is to use all this prized data to serve highly relevant personalized ads - in a certain manner, and adjusted for its scale and audience, Intuit's purpose is to follow the same playbook that made Alphabet (GOOG) and Facebook (FB) so profitable.

By integrating data from multiple sources, Intuit will also be able to reinforce its competitive standing through the so-called 'data network effects' (as long as the integration of Credit Karma goes according to plan). These data network effects occur when a firm gains an advantage by gathering customer data and making that data more valuable to all other customers.

Typically, in a product benefiting from such network effects, there is a sort of 'central repository' that consolidates data from distinct origins. The more data is added to this repository, the more valuable it becomes and the company can then use that information both to develop better algorithms and to attract new customers to the platform. These effects are the reason why Google continues to be the most dominant, profitable, and relevant information retrieval system ever designed.

Currently, Credit Karma provides about 37 million monthly active users with free access to credit scores, credit monitoring, data-breach alerts, and tax-filing services; in exchange, this privately-held company makes money by recommending products such as credit cards and loans based on users' financial data. Though Credit Karma's estimated market share stands at a very low 3%, the company is growing fast; moreover, its users include about half of all Millennials in the United States (or twice as many as Intuit). The transaction, which has drawn many critics*, should almost double Intuit's estimated addressable market from USD 29 billion to approximately 57 billion.

*A pertinent example: according to John Newman, a former DOJ Antitrust Division trial attorney, "Allowing a near-monopolist (Intuit) to eliminate a maverick competitor (Credit Karma) poses obvious risks of harm (…) it's hard to imagine any reason why this should be allowed."

Competition from the Public Sector: In aggregate, American taxpayers spend 6-8 billion hours filing their taxes each year; in addition to this immense amount of time, Americans also spend up to 215 billion dollars annually to keep the IRS off their backs. Collecting records, completing worksheets, and filling out tax returns are mind-numbing tasks for most people. But the IRS could do the taxes of millions of Americans for free if only the political establishment would let it. After all, the IRS already possesses most of the information it needs to automatically produce tax files; such a free system is the norm in most developed countries around the world, including in the Netherlands, Norway, Japan, New Zealand, Estonia, Great Britain, and many others.

However, 90% of all the taxpayers in America either use software or pay someone to file their taxes. This state of affairs benefits tax return preparers, but it also enriches the maker of the TurboTax software used by masses of Americans; no wonder then that Intuit has spent millions of dollars lobbying to ban the IRS from offering free and simple tax filing. The success of TurboTax thus rests on a seemingly precarious foundation that can collapse overnight if Intuit fails to shape the law.

Capitalist markets crave convenience, simplicity, accessibility, and affordability; in contrast, these markets loathe complication, protectionism, inefficiency, and high costs (both financial and all others). This helps to explain why open markets tend to become more efficient over time. Being so, by spending vast sums of money to maintain an artificially inefficient status quo, Intuit is fighting the basic forces of capitalism.

Intuit is also the subject of lawsuits - claiming that the company engages in "egregious false advertising", for instance - and regulatory inquiries relating to the provision and marketing of the TurboTax product. Recently, a biting government audit found that some 14 million Americans paid for tax preparation services they could have received for free. This seems to have greatly benefited both H&R Block and Intuit, which may have made over a billion dollars in additional sales. For how much longer can Intuit maintain the current situation?

Well, Intuit can maintain it for many years or even decades, it seems: first, due to ingrained cultural and political views, many Americans would balk at the idea of letting the IRS prepare their tax returns; second, overhauling the complex tax-payment apparatus would be a very fractious and expensive undertaking (the IRS, which is chronically understaffed, would have to grow considerably to handle millions of software queries); third, some politicians and other agents are frightened by the possibility that a more efficient collection of taxes could lead to a larger public sector or government overspending; and finally, Intuit's commitment to provide a free tax offering has indeed meant that millions of Turbo Tax users paid nothing for the service over the last decade.

As it stands now, by respecting the so-called 'Free File Program', the IRS has agreed it will not compete with Intuit or with other for-profit companies like H&R Block. Under this program, the IRS has worked with these players so as to provide free returns for low and middle-income taxpayers, at no cost.

However, only 2.5 million of the 104 million Americans eligible for Free File ended up using it in 2019; this low adherence of 2.4% has led the Treasury Inspector General for Tax Administration (TIGTA) to state disapprovingly that "The process to participate in the Free File Program is fraught with complexity and confusion. IRS management seems unaware of the complexity and confusion taxpayers face."

The program's continuity depends on a number of external factors, including public awareness of the free program and continued government support (the current agreement is scheduled to expire in October 2021). Either way, considering the heat the company has taken lately, and with or without Free File, Intuit can still be pressured to include previously unavailable premium features in the company's free tax-filing offerings; moreover, some proposed forms of tax reform would also impact Intuit's ProConnect business. All this, in turn, could obviously erase a large part of its future revenues.

4. Is Intuit present in attractive markets offering clear growth runways? Yes: 1 Point

Valued on average at USD 7.5 billion in 2019, the global accounting software market was expected to grow at an optimistic CAGR of about 6.0%-8.5% up to 2025. The COVID-19 crisis has changed these sanguine expectations and made growth projections even more futile than usual. With or without a vaccine it is, of course, impossible to come up with a model to predict how the crisis will evolve over the next couple of years* and how exactly Intuit will be affected by its consequences - in the end "all models are wrong, but some are useful", be it epidemiological models, valuation models or growth projection models. Over the long-term, though, the odds are still stacked in Intuit's favor.

Indeed, the last decades have seen substantial growth in the small and personal business sectors that form Intuit's old stomping grounds, and information technology has been a major contributor to this secular trend. The expanding digital infrastructure reduced the costs of starting and running a small business, revealed new markets, lowered competitive barriers, and led to the creation of disruptive business models. Today, by leveraging the offerings of global behemoths like Amazon (AMZN), Shopify, or Facebook, among many others, just about anyone can become an entrepreneur either in Lebanon, New Hampshire or in Lebanon, the Middle East country.

However, as the digital infrastructure matures and becomes commonplace, small and medium-sized enterprises - usually late adopters of innovation -will need to employ new and better technologies to create, manage, and market their offerings in today's complex, hypercompetitive environment.

Businesses that fail to embrace technological change will be under increasing competitive pressure from more savvy competitors. In fact, digital adoption can be a do-or-die affair for most business owners. In particular, with roughly two-thirds of small-business owners feeling they are not very knowledgeable about finance and accounting (and with a staggering 82% of small businesses failing due to poor cash flow management), using digital products like accounting software is currently a basic prerequisite to survive and thrive in the marketplace.

According to Deloitte, relative to businesses that have low levels of digital adoption, more digitally-advanced businesses realize significant benefits. For example, such businesses earned two times as much revenue per employee than late adopters. Such pressures stand to benefit Intuit, a dominant company with captive customers that provides cost-effective tools to improve the compliance, efficiency, productivity, and operations of increasing numbers of small and medium-sized enterprises (SMEs). The lifeblood of the world economy, these small businesses are extraordinarily varied and plentiful: in aggregate, they account for about 90% of the firms across the planet, for 50%-60% of the global employment, and for 40%-60% of the GDP in most countries.

In the United States alone, small businesses make up 99.7% of all firms with paid employees. As stated by Intuit, there are approximately 460-600 million SMEs in the world, a massive number that has the double advantage of offering consumer-like scale and an abundance of direct monetization opportunities. Intuit's addressable market is therefore enormous no matter how one slices it.

On a global basis, this market is also fragmented and largely underpenetrated: even in a developed country like the US, anywhere between 18% and 36% of small-business owners still aren't using any form of accounting software; furthermore, cloud accounting penetration in the US market is still less than 15%-25% (which compares to around 50% penetration in countries like New Zealand). Outside of the UK, US, and Canada, total penetration of the global TAM by all cloud-based accounting players is likely less than 5%, a very low percentage that points to a very long growth runway ahead.

As SMBs proliferate, as complexity and transnational trade increase, and as e-commerce growth accelerates (one of the evident outcomes of the current crisis), Intuit will most likely grow with the growth of the strange bedfellows with which it has integrations, such as Square (credit card payments), PayPal and Stripe (online payments), Salesforce (customer relationship management), or Amazon and Shopify (e-commerce). In a certain sense, betting against the growth of Intuit is also betting against the growth of these expanding companies.

Notwithstanding its intrinsic attractiveness, the market where Intuit operates also has a few weaknesses. For example, Intuit's revenues are both cyclical and seasonal because the total number of returns filed with the IRS fluctuates in tandem with the wider economy and the time of the year; moreover, Intuit's customer turnover is not trivial, as the death rates of small businesses are usually high even during good times: according to the Small Business Administration Office of Advocacy (2018), in the United States only 45%-51% of small businesses survive the five-year mark, and only about one-third survive 10 years or longer. On the other hand, in favorable years like 2013 - when the S&P500 was up 30% - the US economy has created roughly 540.000 new businesses per month.

The rapid rise and demise of small businesses explain QuickBooks' deceptively poor customer retention rate of roughly 80 percent: while low compared to other enterprise offerings, this rate is actually quite solid when the wider context is taken into account (other companies that serve small businesses, like Shopify or Paychex, for example, also exhibit retention rates of 70%-80%). Customer churn can have a sizable impact on financial results because it is usually less expensive to keep current customers than acquire new ones.

The markets for software and related services are also characterized by fast technological change, shifting customer needs, and constant new product introductions and enhancements; therefore, to remain competitive, Intuit needs to invest continuously in order to innovate and develop new products and services, as well as to improve existing offerings.

Despite these shortcomings, the digitization of services, the expectation on the part of customers of more personalized experiences, and the substantial expansion in the self-employed workforce (which includes the rising numbers of 'gig workers') should all unlock significant opportunities to drive growth over the long-term.

What's more, about three-quarters of all US small businesses will be owned by tech-savvy Millennials by 2025. This statistic has deep implications for the adoption of technology by newer generations of SMEs because, unlike many of their predecessors, Millennials won't be running their businesses on pen & paper or on Excel spreadsheets; mandated by legislators and governments worldwide, the increasing computerization of tax - which is forcing many businesses to take the digital route to submit tax returns online - should also act as a tailwind to the company. To capture all this potential growth, Intuit's strategy is to transform itself into an 'artificial intelligence-driven expert platform' by:

1) Building an open platform where the company and its partners can seamlessly integrate together to solve the problems of customers and improve their financial outcomes;

2) Accelerating the application of artificial intelligence to improve the experience of customers; this technology can already be seen in TurboTax, for example, a program that can use machine learning to create customized financial interviews adapted to each individual situation;

3) Creating more connections among customers, partners, and experts. Currently, Intuit's TurboTax Live already connects TurboTax users with tax experts via a live one-way video; the company will now continue to develop more means to connect customers with experts in order to help them make quick, informed and personalized financial decisions. Due to better connectivity, industry insiders are predicting that the relationship between accountants and their clients will be near-instant - soon, accountants will have an immediate view of their clients' businesses and will be able to interact with these clients in real-time; in addition, accountants will know straight away when certain business aspects change for a client (for example, the accountant will be alerted when their client incurs bad debt resulting from an order placed by a client's customer whose credit rating is low). More and better connections with clients will also enable accountants to solve problems preemptively. According to Intuit, many SME clients are willing to pay their accountants for these richer services; as a consequence, there could be a major revenue and relationship opportunity for those accountancy practices that manage to adopt the company's newer technologies. This, again, should strengthen Intuit's ecosystem and generate win-win interactions for all the involved parties.*

4) Developing deeper relationships with key partners such as accountants, financial organizations, enterprise platforms, and educational institutions; the partnerships will allow the company to co-create strong business connections by sharing expertise, product integrations, and new, tailored solutions to solve more customer problems.

The objective of all the aforementioned measures is clear: while it expands profitably, Intuit's purpose is to reinforce its positive network effects and ecosystem of offerings; besides, the company wants to take advantage of 'user-generated content' - such as the data from customers or the advice from experts - to become more relevant and grow sales without too much exertion in terms of future capital expenditures.

To achieve those goals, the firm intends to harness technologies like cloud computing, data analytics, and artificial intelligence, as well as greater bandwidths (thanks to its speed and greater bandwidth, 5G technology is expected to advance connectivity far beyond what current cellular technology allows - this, in turn, is expected to improve the all-important customer experience).

With such combination, and adjusted to their scale, Intuit will give small companies the ability to benefit from the same type of finance and accounting integration once reserved for large companies. To that end, in 2019 the company increased the number of employees working in artificial intelligence by 60%, developed more than 100 machine learning models, and has filed hundreds of AI-related patents. Intuit will also lay off 715 employees (about 7.3% of its headcount) and add more than 700 roles to build the competencies it needs to execute against its strategy.

Intuit's plan is likely to succeed because it is consistent with the company's long-standing culture of applying digital transformation not as a one-off process but rather as a continuous feature of how it operates; if successfully executed, the strategy will then create a deeper and wider web of interdependencies by reinforcing the connections between the demand side of the network and the supply side of the network; it will also lock-out would-be competitors and lock-in new users more effectively. It looks promising.

*In April 1918, during the last great pandemic, people were fairly confident that the worst was behind them. Then they were hit by an even more ferocious second wave in the fall. Sure, at the beginning of the 20th century, medical science didn't have the tools to fight one of the deadliest influenza viruses Humanity has faced; but, with an effective vaccine still in development, the world today is as vulnerable as its most fragile health system. And there are many fragile health systems around the world. No wonder Warren Buffett appears gloomy.

5. Is Intuit dominant within its core markets? Yes: 1 Point

Intuit's flagship offerings are some of the most dominant within their respective end markets. Despite its age, Mint is still the most widely used budgeting tool and the second most popular personal finance app overall behind PayPal and ahead of Square; Lacerte is also the second most popular high-end professional tax preparation software in the United States behind Thomson Reuters' UltraTax CS and ahead of Wolters Kluwer's (OTCPK:WTKWY) CCH ProSystem fx. On its part, Intuit's ProConnect is still the most widely used professional tax preparation software in the domestic market.

Of course, Mint, Lacerte, and ProConnect are all relevant to Intuit's ecosystem of products but, in terms of strategic importance, they cannot be compared to the company's two largest moneymakers: TurboTax and QuickBooks. Approximately 40 million Americans filed their taxes online with Intuit's TurboTax in 2019, which was far more than with any other tax prep software.

The number of TurboTax users has been growing at a measured but consistent pace as new cohorts of US taxpayers turns to financial software to do their taxes: according to the IRS, the amount of self-prepared returns filed in 2019 increased by about 3.3% compared to the previous season, whereas the number of returns filed by accounting professionals declined by 1% over the same interval. And, unfortunately to H&R Block and its network of accounting pros, Intuit has been the main beneficiary of the ongoing shift from the assisted tax preparation mode to the digital, do-it-yourself mode.

To add insult to HRB's injury, Intuit also launched its TurboTax Live offering, which is aimed at consumers who still want some form of tax assistance. Because it lets consumers interact with certified public accountants without leaving their homes - a behavior that fits the demands of a post-pandemic world - this pioneering offering is expected to grab more market share over the next few years and to have a transformative effect on the way many Americans (and especially the 'digital-native' generations) prepare their taxes.

Intuit's moneymaker QuickBooks also dominates a high share of its respective market. Initially, QuickBooks became one of the most popular enterprise software solutions for SMEs through a combination of reliability, ease-of-use, accessible entry-level price points, and marketing muscle; today, QuickBooks leads the market in the United States, which is still the largest and most profitable market in the world for accounting software. QuickBooks also occupies a leading position in India and Canada - with strong competition from privately-held FreshBooks - and a distant second place in Australia and the United Kingdom (behind Xero). On a global basis, QuickBooks has nearly 6.0 million paying customers.

It should be noted that Intuit didn't release a UK-specific version of QuickBooks Online until 2011, a fact that gave Xero the upper hand in this important market. QuickBooks has a strong presence in the European Union as well: it is the most popular solution in countries like Italy, Greece, Poland, Portugal, and Spain and the second most popular in Austria, Belgium, and Ireland. According to Datanyze, QuickBooks is equally one of the top accounting programs in Singapore, Malaysia, South Korea, and South Africa.

Outside of the largest geographies, the market for SME accounting software is too large and too fragmented for any one vendor to build a truly dominant share. Still, in terms of global sales, there is a massive difference between the top players - like Xero, Sage or Intuit - and the 10th or 11th player in any given local or regional market (in other words, QuickBook's end market has a 'long tail' of smallish software vendors vying for local customers).

On the flip side, many of the behemoths of enterprise software - like IBM (IBM), SAP (SAP), and Oracle (ORCL) - sell few offerings to the enormous global SME market. Why? Because these companies cannot have a USD 120k sales person selling into an account that will only return USD 500 of sales per year. Intuit is therefore within a 'goldilocks' zone of the enterprise software market.

6. Has Intuit maintained high average Cash Returns On Invested Capital (>15%) over the last 10 years? Yes: 1 Point

This occupation of a goldilocks zone explains in part why Intuit is so profitable: besides serving a large and fragmented market where it faces relatively few threats to its competitively advantaged position, the company also profits from the fact that its millions of locked-in SME customers have no real bargaining power. For software providers, dealing with small businesses is much easier and lucrative than dealing with large corporations. Other mature software companies that serve individuals and small businesses - like Paychex or Adobe (ADBE) - are also within that highly profitable zone.

The other parts that explain Intuit's profitability are its extensive scale, the very low incremental costs of providing its mission-critical solutions to SMEs and consumers, and the good capital allocation skills of the management team (however, as mentioned before, the jury is still out regarding Intuit's latest acquisitive moves).

Such a potent mixture has resulted in returns on invested capital well in excess of Intuit's estimated WACC of about 6.5%. Even when goodwill and intangibles are included in the calculation, the company's ROIC has averaged a very healthy 30% over the past decade of operations. H&R Block only achieved a respectable but much lower average ROIC of 20.1% during the same period.

1. Return on Invested Capital - Intuit vs. Peers

As shown above, Intuit has been the most potent wealth creator within its chosen peer group* (Xero is still spending heavily to acquire clients, hence its negative returns on capital). However, the acquisition of Credit Karma will certainly inflate goodwill and intangibles and depress Intuit's ROIC, at least over the short- to medium-term. Shareholders should hold management's feet to the fire to deliver adequate returns on all the capital they allocate, and that naturally includes the capital used to pay well above the sum of the net fair value of all the acquired assets. Now, it remains to be seen if the Credit Karma deal is going to generate the same long-term economic profitability that has made Intuit so attractive to investors in previous years.

*Please note that no company within the chosen peer group is perfectly comparable to Intuit.

7. Is Intuit a superior cash-generative business? Yes: 1 Point

The beauty of achieving consistently high returns on capital is that even a slow growth rate is enough to create added value through the generation of plentiful cash flow. This cash flow can then be allocated to dividends, sensible share repurchases, and growth initiatives. Cash flow is also what determines the value of a firm to investors. This concept is easier to grasp when a given business is viewed through the lens of a private business owner: if this owner purchased a business that he could not sell for 30 years, he would derive value exclusively from the cash flow generated by that business over time; meanwhile, his returns would be quantified based on the size of those cash flows relative to the original acquisition price. Being so, and considering the importance of cash flow, how cash-generative is then Intuit?

Intuit | Free Cash Flow Generation & FCF per Share: Intuit has always been Free Cash Flow-positive over the past decade, a period through which cash flow generation increased by an impressive 158% (from USD 855 million in 2010 to USD 2169 million in 2019). On a per-share basis, FCF has expanded by 194% over the same period as Intuit repurchased shares and became more efficient; H&R Block and Thomson Reuters, on the other hand, saw their FCF per share compress by -30% and by -118%, respectively, during the same interval. No competitor even comes close to Intuit in this instance; however, over the medium-term, the current crisis will, of course, harm the company's FCF generation.

2. Free Cash Flow Growth Per Share - Intuit vs. Peers

Intuit | Free Cash Flow Margin (5-year average): Generating abundant and growing FCF is always desirable but the amount should be scaled by revenue to show what proportion of the top line gets converted into cash. Intuit's current FCF/Sales (TTM) ratio is 27%, an outstanding percentage that translates a very healthy conversion of sales into FCF; on average, this parameter has been around the 27.6% mark during the last 5 years of activity. Here too Intuit tops its peer group by a comfortable margin.

3. Free Cash Flow Margin - Intuit vs. Peers

Intuit | Cash Conversion Rate (5-year average): As measured by Free Cash Flow/Net Income, Intuit' CCR averaged an impressive 135% between 2015 and 2019 (ratios above 100% reveal an excellent translation of net income into cash); obviously, companies that do not achieve a high conversion - and there are many - are more inhibited in their capacity to reinvest in the business or return money to shareholders. Due to its relationship with the accrual ratio, the CCR also provides a means to identify firms with high earnings quality*. As shown by Sloan and others, companies with low or negative accrual ratios like Intuit tend to outperform companies with high accrual ratios.

4. Cash Conversion Rate - Intuit vs. Peers

* The accrual ratio can be calculated as (Net Income - FCF) scaled by total assets - when FCF is larger than Net Income (that is, when the CCR > 1 in any given year), accruals are negative. This means that cash earnings - or 'real' earnings - are higher than accrual earnings and that earnings quality is high.

Intuit| CapEx/Operating Cash Flow (5-year average): Capital-light companies obviously require lower amounts of capital to realize equal or superior profits than capital-heavy companies. For example, hardware producers or oil and gas corporations must always invest in expensive PP&E that requires periodic repair and replacement; such businesses must also tie up cash in assets like inventory. Software companies, on the other hand, might use close to zero major physical assets. Intuit is the epitome of a capital-light business as CapEx, on average, only consumed 8.5% of the company's OCF over the past half-decade. Intuit does not need to reinvest a large portion of the cash generated by its operations just to keep on functioning and growing, which again indicates that the company is capable of generating surplus capital with relative ease.

5. CapEx to Operating Cash Flow - Intuit vs. Peers

Naturally, lower intra-industry average ratios are in general better than higher ratios; however, their long-term trend needs to be monitored because chronically low or falling ratios can also signal lethargic demand, challenges to execution, heightened competition or absence of reinvestment opportunities. None of these situations affected Intuit but they certainly affected Sage, a firm that struggled to migrate its customers and services from a standard license model to its cloud platform.

8. Has Intuit been able to consistently increase sales over the past 10 years? Neutral: 0 Points

Being a cyclical company, Intuit does not perform equally well regardless of the economic environment. Still, supported by the benign economy of the last decade, Intuit has displayed a consistently solid performance on the sales front. Over that period, Intuit only delivered negative sales growth in 2015 as it solidified its transition to a cloud-based business model; ultimately, this transition helped to create recurring streams that made revenues more predictable and lessened repeat customer acquisition efforts. A series of divestments, the new recognition of revenue on a ratable basis, as well as an impairment charge of about USD 260 million against goodwill, have also impacted the company's performance in 2015.

6. Revenue Growth - Intuit

That speed bump was not structural, though, because Intuit's sales were not affected by weakened competitiveness or by persistent market share losses. However, the company's latest quarter results offered a glimpse of what the future might bring: compared to the year-ago quarter, third quarter 2020 revenues declined by 8.25% due both to the negative effects of the lockdown on small businesses and to the extension of the tax filing deadline in the US (the extension of the deadline is a temporary issue, of course; either way, due to the high levels of unemployment, Intuit won't be able to recoup all its lost revenue). Naturally, upcoming quarters are expected to see a deceleration in the company's sales and an acceleration of customer churn.

9. Is Intuit financially strong? Yes: 1 Point

Can Intuit cover payments on its outstanding corporate debt without difficulty? According to Moody's (MCO) it can, as the credit ratings agency assigns an A3 long-term rating to the company, with a stable outlook. This rating is a reflection of Intuit's market leadership, highly recognized offerings, low financial leverage levels, and established recurring revenue streams. Long-term debt and other long-term liabilities now account for only 4% of the company's total current liabilities, whereas short-term debt and other short-term liabilities account for 25.8% of Intuit's debt obligations. Total liabilities have been declining since 2016.

On aggregate, these numbers are translated into a strong debt-to-equity ratio of only 0.06 and in a rather high cash-to-debt ratio of 6.58, as well as in quick and current ratios of 1.70 and 1.79, respectively. Intuit's interest coverage ratio stands at an impressive 158.5. The company's current Altman Z-Score of 18.8 also places Intuit well inside the 'safe zone' and shows that the firm is nowhere near bankruptcy; at the present, though, Intuit has a low Piotroski F-Score of 5 (out of 9); also, with the acquisition of Credit Karma, the company will deplete its stores of cash to near zero. For the time being, though, Intuit seems to be in good financial shape. All these parameters suggest that the company is slightly leveraged for growth and not at all exposed to default risk.

10. Is Intuit highly productive and profitable relative to its assets? Yes: 1 Point

Asset productivity is a key contributor to shareholder value. Being so, how productive is Intuit relative to its total assets? There are of course several parameters that can be used to answer this question, including the company's total asset turnover (which measures the efficiency of total assets in producing sales) or the return on assets (which measures the overall profitability of assets by scaling net income by total assets).

However, because net income can be manipulated, the following analysis will instead focus its attention on Intuit's gross profitability (which is calculated as gross profits/total assets). This parameter uses gross profits instead of earnings because gross profits are often a purer measure of economic productivity (as they are not usually affected by accounting tricks); besides, gross profits are not impacted by advertising or R&D expenses, or by other capital expenditures incurred to improve a company's competitive positioning.

In very general terms and over the long-term, any given company should be able to exceed an average gross profitability of 33% regardless of the sector or industry where it operates. That is the minimum hurdle of asset productivity. Said differently, companies should be able to generate throughout the years a minimum of USD 3.3 of gross profits for every USD 10 invested in assets.

There's no hard-and-fast rule to analyze a given company along this dimension but the calculation should be made both with and without goodwill just to make sure the firm is not overpaying for unproductive acquisitions over time; in Intuit's case, goodwill has been responsible for about 28% of the company's total assets throughout the last decade, showing that Intuit has been moderately acquisitive.

The calculation should also adjust for the presence of a large amount of cash and short-term investments in the balance sheet because, if 'excess' cash is included in the calculation, companies like Microsoft, for instance, would apparently fail to reach the minimum 33% threshold of gross profitability; however, after adjusting for its presence, it is possible to verify that this cash-rich firm (cash comprises about 48% of MSFT's total assets) is in fact quite productive and profitable relative to its assets. In Intuit's case, cash and short-term investments currently account for a staggering 51.2% of assets.

A chronically depressed gross profitability ratio (<33%) indicates trouble around the corner, especially for growing companies: striving for sales growth often means large upfront investments in assets, including in facilities, equipment, or accounts receivables. Any protracted decline in demand - prompted by a pandemic crisis, for example - can then leave an expanding company stranded and overinvested in assets it cannot divest to pay its bills. This can have grave financial consequences. That's not the case regarding Intuit, though: as shown below, relative to its asset base, Intuit has been the most productive company within its peer group by far. In fact, along this specific dimension, Intuit is one of the most productive large-cap companies in the world.

7. Gross Profits to Assets - Intuit vs. Peers

Intuit's gross profitability ratio averaged 138% since 2015. This means, naturally, that the amount the company made per annum in gross profits was substantially larger than the amount it owned in total assets (excluding cash). And the trend continues mostly unabated. These results are almost beyond belief, even for an asset-light software maker. Intuit more than doubles Sage's average gross profitability of 59%; with an average ratio of 107%, the only competitor that comes remotely close to the American firm is Xero. Among its peer group, Intuit is also the most efficient company at generating revenue from its streamlined asset base.

8. Asset Turnover - Intuit vs. Peers

10. Does Intuit exhibit a high degree of pricing power? Yes: 1 Point

"You can determine the strength of a business over time by the amount of agony they go through in raising prices" (Warren Buffett).

Pricing power is one of the main attributes of a strong business. A major difference between a compounder and an average company is that the former can mitigate the impact of falling demand through its capacity to raise prices without alienating customers. Along with the presence of recurring revenue streams, pricing power is, therefore, one of the features that allow the top line to hold up better during harsher times. Pricing power also enables strong businesses to reduce prices temporarily in order to capture market share without compromising its long-term prospects (and indeed that is what Intuit has been doing in markets like the UK).

Judging by the prices it has been able to charge over the years, Intuit surely seems to be one of those strong businesses. This assertion is confirmed by Intuit's small competitor ZipBooks, for example, when it stated that the company's "many customers feel like price changes happen often. This is a frustration for many, because the learning curve, time, and information they've put into QuickBooks make it unlikely for them to switch despite price increases." Because it benefits from two of the most effective types of competitive advantages, regular price hikes are not at all agonizing for Intuit. In fact, the company was able to raise prices by as much as 66% for many QuickBooks' customers in the recent past. Of course, Intuit can drive its prices and profits upward as long as the cost to the customer does not exceed the cost of switching to a competing provider. Concerning TurboTax, and to "encourage early filling", the company was able to hike prices in March 2015, March 2016, February 2018 and February 2019 as (remarkably) it gained market share.

Intuit also charges higher fees than its nearest rivals for equivalent software solutions: for example, at the lowest per-month fee, QuickBooks Online costs USD 15-25/month while Xero and Sage only charge USD 9 and USD 10, respectively, to small businesses; QuickBooks' top-tier plan is more expensive too, as it costs USD 150 per month compared to Xero's USD 60 or Sage's USD 25-78. There is also a large price difference between paid versions of TurboTax online (which cost USD 110 - 170) and similar versions from H&R Block (USD 67 - 117) or TaxAct (USD 68 - 115)*.

Intuit's capacity to charge higher prices than competitors - and to raise those prices on a regular basis - is reflected in the company's operating parameters. However, by looking only at average gross margins (which is the classical way to estimate pricing power) one would presume that Sage is superior to Intuit in this regard:

9. Gross Margin - Intuit vs. Peers

But that would ignore the fact that operating margins are also an important factor in the evaluation of pricing power - after all, for modern knowledge-based companies like Intuit, pricing power also arises from a company's intellectual property and research & development prowess. And R&D is, of course, an item included in the calculation of operating margins. As shown below, Intuit is the company with higher average operating margin among its peer group.

10. Operating Margin - Intuit vs. Peers

Moreover, pricing power must also be assessed via a company's average ROIC throughout the years (as persistently high returns on capital can only be maintained when competitors are not stealing customers and economic profits) and long-term sales trajectory (which is a reflection of market share gains and losses). Being so, by finally considering Intuit's market share stability, strong operating margins, and remarkable returns on capital (which are the highest among its peer group), there can be no doubts that the company has indeed a high degree of pricing power.

*Some prices may have changed at the time of publication.

Intuit | Valuation

Relative Valuation: With a free cash yield of only 2.6% and an earnings yield of 1.8%, Intuit's valuation surely looks full and about to overflow; the company's EV/EBITDA is also very high at 39.4. In fact, Intuit is now displaying its highest price multiples of the past five years amid a context marked by a pandemic crisis. Paying up for high-quality companies sometimes makes sense but paying too much is rarely a good idea, of course. Currently, the market at large seems to be projecting an enthusiastic earnings growth rate on the part of this strong but cyclical firm. For Intuit to re-rate, either growth has to accelerate meaningfully - very unlikely considering the current economic deceleration and uncertainty - or multiples need to compress. Nevertheless, when compared to most peers, Intuit certainly deserves a premium valuation.

Absolute Valuation (Discounted Cash Flow Analysis) | Main Assumptions

Revenues: A series of factors and trends should all allow the company to capture further market share in the United States and international markets. These include innovative offerings like TurboTax Live and QuickBooks Live, cross-selling of services, rising numbers of freelancers, gig workers and independent contractors, further computerization, and Intuit's envisioned suite of new interconnected solutions. The acquisition of Credit Karma might also bolster revenues over the medium-term, but this is a highly speculative assumption. Still, because Intuit seems to be reinforcing its switching barriers and positive network externalities, retention of existing (and surviving) customers should likely improve over the next 5 years. Over time, solutions like QBO should also enable Intuit to expand its business in underpenetrated markets such as India, Brazil, and France. However, the COVID-19 crisis should still exert a negative impact on the company's revenues up to 2022-2023 - perhaps inaccurately, the model assumes that it will take a minimum of 3-4 years to 1) develop effective vaccines against the SARS-CoV-2 virus; 2) immunize large segments of the world's population; and 3) restore a semblance of self-sustained growth in the global economy. As a consequence of all these factors, the model assumes high revenue volatility translated into negative sales growth of - 10% in 2020-2021, a reacceleration of revenues to 2%-6% in 2022-2023, and finally, a further reacceleration to 8%-12% in 2024.

Gross and Operating Margins: The model assumes that gross margins will stay within the 80.0%-82.5% range over the next 5 years (down from the average gross margin of 83.5% achieved between 2015 and 2019). Meanwhile, as both customer retention and operating leverage are anticipated to improve, the model also assumes that SG&A expenses should decrease by about 5%-10% from the current levels over the forecast period; on their part, R&D expenses as a percentage of sales are expected to fall within the 19%-19.5% interval. This, in turn, should lead to operating margins of 27%-28% by 2024. Further margin improvements should be more difficult to achieve due to competitive pressures exerted by aggressive rivals like Xero.

Operating Cash Investments: The model assumes that the sum of capital expenditures investments with the changes in working capital will reach a level equivalent to 8.5%-10.5% of revenues, on average, per year; it also estimates that invested capital will reach an amount equivalent to 20%-25% of sales, on average, per year, in line with the company's investments over the preceding years.

Cost of Capital, Terminal Growth Rate, and Fair Value Estimate: The DCF model assumes a WACC within the 6.5% + [± 1.5%] range. The model also assumes a terminal growth rate between 1% and 2%. After a sensitivity analysis, the valuation model delivers a present-day fair value estimate range between USD 250 and USD 270 per share, implying that Intuit is currently overvalued.

Intuit | Conclusion

Making it one of the highest-quality mature companies within the tech sector, the Quality Score for Intuit is 8 out of 11 possible points. As mentioned by Aswath Damodaran "There are more 'bad' businesses in the world than most people realize. In fact, it is the 'good' business that is unusual, not the 'bad' one." Intuit is one of those unusual and unusually good businesses, of which there are probably less than 75-100 on a worldwide basis.

The pressure of this pandemic accelerated DIY trends and the adoption of certain technologies. It also changed how people interact with each other. Progress out of the crisis will be predicated on solutions that reinforce human connections by encouraging rapid and effective collaboration at a distance. These changes should benefit Intuit over the long-term.

However, while clean balance sheets, strong corporate cultures, high sales growth, high profit margins and high returns on capital are clearly alluring attributes, there are many high-quality companies that have made for inferior investments and many low-quality companies that have made their stockholders wealthy: without considering the price paid, high-quality is not at all a guarantee of adequate returns. And Intuit seems overvalued for now.

Intuit also operates within an economically-sensitive industry and, given the likelihood of the biggest global recession since the Depression, the company's medium-term outlook is a bit murky (to say the least). Indeed, the company has yet to see what its prospects look like when bankruptcies really start to cascade through the economy.

Besides, prospective investors cannot ignore the risks looming over the horizon, as one day Intuit might be forced to include previously unavailable premium features in the company's free tax-filing offerings. In addition to its impact on revenues, such a forced move could obviously obliterate its current levels of profitability (the Consumer unit, which offers these free tax-filing solutions, generates gross margins of about 63%, whereas the SBSE unit 'only' produces gross margins of roughly 44%).

By itself, however, this is probably not enough to preclude a future investment in Intuit. Thanks to the unique triumvirate of Mint, TurboTax, and QuickBooks, no company has more data on the finances of individuals and small businesses in the United States. This precious asset gives Intuit immense optionality, new insights, and new opportunities to replace waning businesses at a time when proprietary data is solidifying its standing as the new gold. With such data, artificial intelligence can arguably do wonders in Intuit's arena. Many skeptics argue that customer and consumer data is a commodity. It is not, as attested by the meteoric rise of data-driven companies like Alphabet, Facebook, Amazon, or even Credit Karma (tellingly, in 2019, Facebook produced almost four times more free cash flow than Exxon Mobil (XOM), which was the largest company in the USA just a few years ago).

Moreover, as a very general rule, investors should never bet against a company introducing efficiency within a given system (as attested by the preeminence of SaaS companies, for example); Intuit is reducing entropy and increasing gains for those involved within its narrower ecosystem but it is also, arguably, decreasing the gains of millions by lobbying to ban the IRS from offering free tax filing. Yet, throughout its history, Intuit has been reshaping its goals and methods to match the demands of the world outside. And this specialist in self-disruption is doing it again. Even with its risks and stretched valuation (which makes it a 'hold'), and to paraphrase Scott Cook, Intuit still "functions well and feels good to the senses."

This article was written by

From Portugal, educated in Portugal and in the UK. Investor for a relatively long time - 26 years. Higher education: Radiation Physics; Radiology; Medical Imaging; Radiation Protection; Radiobiology.

Disclosure: I am/we are long INTU, XROLF. 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.

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