Intuit’s (NASDAQ:INTU) journey from a digital checkbook known as Quicken in 1983 to an AI-driven financial platform is a compelling tale of innovation and adaptation. Over the past four decades, the company has continuously reinvented itself, reshaping the way individuals and small businesses manage their finances. This article explores Intuit’s transformation, examining its strategic acquisitions, AI-focused business model, and financial performance, while also addressing potential market risks. We believe that Intuit’s AI-driven approach, coupled with its strategic acquisitions and promising financials, positions the company as a strong investment prospect, notwithstanding certain market challenges.
Transition to AI-Driven Expert Platform
Since its inception in 1983 as a digital checkbook known as Quicken, Intuit has undergone several transformative iterations. Over the past four decades, the software firm has not only reinvented itself but also reshaped the way individuals and small businesses handle their finances. The company’s transition from a tax and accounting platform to a holistic financial platform for individuals and small businesses marked a pivotal point in its growth trajectory. This shift was further reinforced by the acquisitions of Credit Karma and Mailchimp, valued at $8.1 billion and $12 billion respectively, underlining the company’s commitment to leveraging data to enhance customer value.
The company’s commitment to innovation is also demonstrated through its long-standing investment in AI, a fact that often gets overlooked amidst the hype around tech giants like OpenAI, Microsoft (MSFT), and Google (GOOG). Indeed, former CEO Brad Smith acknowledged this evolution at the 2017 analyst day, tracing the company’s technology journey from DOS to Windows, web, cloud, mobile, and finally to AI.
When current CEO Sasan Goodarzi took over in 2019, he further accentuated the company’s AI-driven approach by announcing five major strategic bets. Central to these was the transformation of Intuit from a tax and accounting platform into an AI-driven platform that could assist customers in making informed financial decisions. This strategic shift has not only fostered remarkable growth but also showcased the company’s ability to adapt to market changes and customer needs.
To bolster its AI capabilities and align with its goals, Intuit announced in June 2020 that it was restructuring its workforce, laying off over 715 employees while simultaneously creating over 700 new roles aligned with its goals of becoming an AI-driven company. The company’s transition to an AI-driven platform signifies a fundamental realignment, changing from a company that equips customers with tools to one that proactively works for them. This shift simplifies the user experience, fuels customer success, and turns the platform into a one-stop-shop for small businesses to manage customers, cash flow, and growth.
A key component of Intuit’s strategy is the coupling of its digital platform with expertise, encompassing data, AI, and human insights. This approach addresses a significant challenge for its customers: confidence in managing their finances. By providing on-demand expert advice powered by AI, the company is not just simplifying financial management but revolutionizing it.
The 2021 acquisition of Mailchimp further underscores Intuit’s commitment to becoming a comprehensive solution for small businesses. This strategic move combines customer and purchasing data in one place, thereby enhancing customer engagement and creating new service opportunities. Notably, Intuit reported a 20% small business growth and 24% online growth last quarter, even before factoring in Mailchimp’s contribution, attesting to the efficacy of its strategy.
Intuit’s transformation into an AI-driven expert platform has already yielded substantial results. The company’s focus on confidence-building through the provision of expert advice, combined with its aggressive conversion strategy and strategic acquisitions, positions it as a promising prospect for both individuals and small businesses alike. As the company continues on this trajectory, we anticipate even more exciting opportunities for the future.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
INTU’s FY Q2 earnings report on 02/24/2023 was a bright spot, driving a 1.9% uptick in stock value in the immediate aftermath. The 13.8% year-on-year revenue growth to $3,041 million notably outperformed consensus estimates by 4.5%, and the earnings per share (EPS) for the quarter surged by 42% year on year, coming in at $2.20, an impressive 49.9% ahead of consensus.
In our view, one of the key performance indicators in this report is the operating margin. INTU’s operating margin was 28.1%, a significant improvement on the 22.9% reported a year ago. This increase is indicative of heightened operational efficiency, and we believe it’s a sign of effective cost management and potentially increased pricing power.
INTU’s past performance also stands out. The 23.3% compound annual growth rate [CAGR] in revenue over the last three fiscal years sets a high bar. Sell-side consensus forecasts point towards this trend continuing, albeit at a slightly slower pace of 11.4% this fiscal year, with revenues estimated to reach $14.2 billion. The following fiscal year is projected to deliver an almost identical growth rate of 11.3%, pushing revenues to $15.8 billion.
The company’s EBIT margin has also been on an upward trajectory, growing from 33.6% to 35.4% over the past three fiscal years, an increase of 1.8 percentage points. Analysts predict that this margin will expand by 205 basis points this fiscal year to 37.4%, and further increase by 51 basis points the following fiscal year to 38.0%.
However, it’s worth noting the dilution risk posed by INTU’s share-based compensation (SBC) policy. Over the past three years, INTU has spent 8.3% of its revenue on SBC, resulting in a 7.1% increase in diluted outstanding common shares. This may account for the EPS CAGR of 20.6% over the same period, trailing the company’s revenue growth.
Despite this, the consensus is optimistic about INTU’s EPS, predicting a rise of 16.7% to $13.83 this fiscal year, and a further 12.0% to $15.49 the following year. The company’s strong return on invested capital, standing at 11.6%, supports this positive outlook.
The company’s performance over the past year has been stellar, with a return of 21.7%, 15 percentage points higher than the S&P 500. However, it’s worth mentioning that the stock is trading at a slight premium, with its FY2 PEG ratio of 1.7 sitting 8.6% above the S&P 500’s PEG ratio of 1.5. This indicates that the stock might be overvalued relative to its expected earnings growth.
While INTU’s share-based compensation policy raises dilution concerns, the company’s strong revenue and margin growth, as well as the positive forecasts, paint a promising picture. The premium valuation could be a point of contention for value-minded investors, but the company’s past and predicted future performance may justify the higher price tag.
Risks
Despite the promising trajectory of Intuit, it’s important to recognize and evaluate potential risks that could hamper its growth. For instance, Intuit’s exposure to small and medium businesses (SMBs) presents inherent challenges. A potential deceleration in customer additions, coupled with increased competition from both existing and new market players, could create headwinds for the firm. In the event of macroeconomic downturns, SMBs are often the first to cut down on spending, which could adversely impact Intuit’s revenue growth.
The firm’s acquisition of Credit Karma in December 2020, which now constitutes a significant portion of its revenue, further exposes Intuit to volatility in the consumer credit market. This was evident in the 4Q22, when weaknesses in personal loans were observed. Post-pandemic changes such as tightening monetary policy have added to this volatility. Should the credit markets further tighten or weaken, Intuit may face incremental revenue impact, leading to potential negative repercussions for its shares.
One of Intuit’s main revenue streams, tax-filing support services, could also face challenges. There’s been a long-term consumer shift towards do-it-yourself (DIY) methods and Intuit’s TurboTax. However, any slowdown, halt, or reversal of this trend could negatively affect the company’s growth and profitability. It’s essential to closely monitor these consumer behavior trends as they can significantly affect Intuit’s bottom line.
Finally, the current uncertain macroeconomic and geopolitical environment has led to businesses, including IT customers, scrutinizing deals more carefully, deferring modernization projects, and potentially reducing their spending. A worsening of this environment could have a negative impact on IT spending and consequently demand for Intuit’s products and services, especially given its exposure to SMBs.
While Intuit’s transformation and growth prospects are undeniably impressive, potential risks related to SMB spending, credit market volatility, changes in tax filing patterns, and the overall macroeconomic environment should not be overlooked. As with any investment, a comprehensive understanding of these challenges is critical for informed decision-making.
Conclusion
Intuit’s transformation into an AI-driven expert platform, reinforced by strategic acquisitions, has ushered in a new era of financial management for individuals and small businesses. Its commitment to innovation, underscored by its investment in AI and data-driven strategies, has fostered remarkable growth and resilience amidst shifting market dynamics. The company’s robust financial performance, evidenced by impressive revenue growth and expanding operating margins, further strengthens our investment thesis.
Nevertheless, potential market risks, including exposure to SMBs, credit market volatility, and uncertainties in tax filing patterns, cannot be ignored. While Intuit’s premium valuation might be a concern for some investors, we believe that the company’s strong past performance and optimistic future projections may justify the higher price tag. As always, a comprehensive understanding of these challenges is critical for making informed investment decisions. In our view, Intuit’s continuous innovation, strategic positioning, and financial resilience make it an intriguing prospect in the financial technology landscape.
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