We’ve spoked about Blend Labs (BLND) and Marqeta (MQ) in past posts as stock we have our eyes on, but nothing in the sense of “I’m buying this stock now, here is why.”
In this post, I’m going to share with you all why I like Intuit (INTU) at its current $565 / share, where I think this stock is headed in the coming years, and what our friends on Wall Street have to say.
If you’re not in the mood to read the entire analysis, the TLDR is:
- Intuit has built an incredible defensive moat around their business and service offerings
- Not only has the company doubled revenue over the last decade, but their trading multiple on the market continues to climb
- Their acquisition of MailChimp unlocked an large TAM of mid-market businesses looking for a full-suite to run their back and front office operations
Let’s jump into this.
As always, we’re going to kick off this stock pitch with a deep dive into what the business currently does and how they make money. From a high level though, you might have an idea by the logos under their name in the above shown image.
According to the company’s Form 10-K filing found here, Intuit helps consumers, small businesses and the self-employed prosper by delivering financial management and compliance products and services – this includes specialized tax products to accounting professionals.
The company’s global products and platforms include TurboTax, QuickBooks, Mint, and Credit Karma. These products and platforms are designed to help consumers and small businesses manage their finances, save money, pay off debt and do their taxes with ease and confidence.
I’d be very surprised if you all haven’t heard of or even tried to use some of the above mentioned companies. For example, I’ve been filing my taxes with TurboTax for the last 2 years – I also have both the Mint and CreditKarma apps downloaded to my phone.
Intuit serves over 100 million customers across their product offerings and platforms, helping them rake in over $9.6 billion in revenue throughout the last 12 months.
Inuit claims to organize their businesses into 4 main business segments –
- Small business & self-employed -49% of revenue
- Consumer – 37% of revenue
- Credit Karma – 9% of revenue
- ProConnect – 5% of revenue
Let’s jump into the nitty gritty of each business segment and begin to quantify the numbers here.
- Small Business & Self-Employed:
“This segment serves small businesses and the self-employed around the world, and the accounting professionals who assist and advise them. Our offerings include QuickBooks financial and business management online services and desktop software, payroll solutions, time tracking, merchant payment processing solutions, and financing for small businesses.”
Essentially, this is money they make from QuickBooks “Online” and “Desktop” offerings.
These offerings provide software surrounding payroll services, small business management, merchant payment processing, and financing.
This business segment plans to grow in three main facets – transforming management software and meeting customers where they are, meet a wider range of customers through a single platform, and expand globally.
TTM Revenue: $4.7 billion (+16% year over year)
Operating income on this revenue increase more than the revenue increase itself, which as we all know, is good news – meaning the company is finding ways to make more money while cutting more expenses.
Operating income increased +24% over the last 12 months for this business segment – a continual step in the right direction.
“This segment serves consumers and includes do-it-yourself and assisted TurboTax income tax preparation products and services sold in the U.S. and Canada. Our Mint offering is a personal finance offering which helps customers track their finances and daily financial behaviors.”
This is essentially their TurboTax business and everything that comes with that. Fun fact, I use TurboTax myself – and I did a TikTok ad for the company. Big fan of the product.
TTM Revenue: $3.5 billion (+14% increase year over year)
Unlike the company’s Small Business and Self-Employed business segment, their Consumer business segment’s operating income did not increase more than or even at the same rate their revenue did – only increasing +8% year over year.
The company’s reasoning for this was higher expenses for staffing, marketing, and outside services – haha, maybe the ad I did for them ate into their operating margin. Funny to think about it that way.
- Credit Karma:
“This segment serves consumers with a personal finance platform that provides personalized recommendations of credit card, home, auto and personal loan, and insurance products; online savings and checking accounts through our partner, MVB Bank, Inc., member FDIC; and access to their credit scores and reports, credit and identity monitoring, credit report dispute, and data-driven resources.”
As you guys can tell by the title of this business segment, this is Credit Karma and everything that comes with that. I’m sure you all have heard of this company / app / website – I use it all the time to monitor my credit score and apply for credit cards that I think will be useful for myself.
The business model here is actually really simple – it’s all referral based.
Credit Karma (Intuit) has deals with American Express, CapitalOne, and countless other financial services companies that will pay them out on a per deal basis. Every time you apply and get accepted for a card on their website, the credit card company pays Credit Karma a little “thank you” commission.
They also have a “cost per click” or “cost per lead” side of things for mortgages and home insurance.
This makes a lot of sense because in their app they’re always asking me if I want to refinance my mortgage – haha.
TTM Revenue: $865 million (no increase to report since they were acquired recently)
Operating income on this business segment sits at a healthy 21% of revenue, or about $182 million over the last 12 months.
“This segment serves professional accountants in the U.S. and Canada, who are essential to both small business success and tax preparation and filing. Our professional tax offerings include Lacerte, ProSeries, and ProConnect Tax Online in the U.S., and ProFile and ProTax Online in Canada.”
This business segment is all about monetizing against the software these tax professionals are using for their own businesses. Revenue for this business segment is relatively flat and increased a modest +5% during the last 12 months to $517 million – driven higher by higher revenue per customer (each tax professional is buying more product from them on average).
Operating income for this business segment outpaced revenue growth over the last 12 months, meaning they’re doing something right!
We now have a deeper understanding of what the company does and how they make money – before we jump into the weeds of everything, let’s also now take some time to better understand how the company performed from a financial and operational perspective as reported in their most recent earnings release.
Recent Financial Results:
Total revenue for the last 3 months was up +41% to $2.6 billion, including the addition of Credit Karma (acquired early 2020).
- Small business and self-employed: revenue +19% to $1.3 billion
- Consumer: revenue +20% to $852 million
- Credit Karma: revenue hit $405 million, a quarterly record for the business
These numbers sound sort of “numb” considering we don’t really have an understanding of what Wall Street analysts expectations were, so let me break these down in such a way that incorporates that.
- Total revenue was $2.56 billion vs. $2.30 billion expected (+11.3% higher)
- Small business revenue was $1.25 billion vs. $1.16 billion expected (+7.7% higher)
- Consumer revenue was $852 million vs. $782 million expected (+9.0% higher)
- Credit Karma revenue was $405 million vs. $323 million expected (+25.4% higher)
Sooo.. what you’re saying is they actually crushed it this last quarter?
Yes – that’s exactly what I’m saying. Glad we’re on the same page.
Now let’s begin to talk through exactly what Intuit has going for them and why they’re trading at a premium to their peers at the moment.
Think about this for a second – and I know this might sound biased or even sort of un-analytical, but it’s TurboTax.. it’s Credit Karma.. it’s QuickBooks!
I’m not sure if any of you all have ever tried to run a small business, but it’s what I’ve been challenged with ever since I quit my job to do this full time in March of 2021 – QuickBooks was a life saver.
I’m also not sure if you all care about credit cards and credit scores or any of that, which I hope you do by the way – but Credit Karma is the absolute authority in that space in regards to tracking and growing your credit score.
Finally, TurboTax – again, maybe biased here because of how easy it was for me to do my 2018 and 2019 taxes with them, but oh my gosh they’re the authority. I remember being at work after graduation in 2018 and my co-worker suggesting TurboTax as how to file because it’s so easy. It was indeed so easy.
I just really want to emphasize as we begin to talk through why this company trades at a premium what an absolute defensive moat they have. Insane first mover advantage and insane market penetration for what they’re after.
So what is their current valuation?
Well, before we get into that, I want to share with you all my thoughts toward any company inspired by one of my favorite investing books of all time 100 Baggers. In the book, we learn two things are incredibly important.
1. Companies that turn into 100X investments grow revenue fast
2. The market grows their premium on that revenue over time
What I mean is, not only if the company making more money every year, but the stock market increases the premium they place on the money that company makes every year – or over time in general.
This, my friend, is what makes me so excited about Intuit – look at this chart that shows their trailing 12 month revenue in relation to their enterprise value over the last decade:
Not only did Intuit grow their revenue from $3.8 billion to $9.6 billion over the last decade, but the valuation multiple.. the premium.. the market put on that revenue grew exponentially.
Well, why does this happen?
Simply put, there’s a lot of reasons – but in Intuit’s case I would imagine their defensive moat as mentioned above really poises them for success over a long period of time which begins to diminish any uncertainty or doubt for the future, as well as their growing free cash flows and strategic acquisitions (something we’ll discuss briefly soon).
Right now, Inuit is trading around 16X their last 12 month’s revenue – so to do the math together now, that’s 16 X $9.633 billion = $154 billion in EV.
Something I wanted to begin to look at now instead of revenue trading multiples were free cash flow multiples – as you all know, we’re big fans of FCF around here and we know exactly how growing FCF per share positively impacts stock price.
At $154 billion in EV, the company is trading at about 73X the last 12 month’s free cash flow. Extrapolate this out toward 2022 (next 12 month’s FCF – a common valuation practice) and you’re now looking at ~49X which seems a lot more reasonable and in line with peers that spit out a ~28% FCF margin.
To put this in perspective, Atlassian (TEAM) is operating at about ~17% FCF margin, growing revenue slightly faster at around +25% annually and is trading at a multiple 4 times higher than Intuit’s.
Sure, Intuit isn’t a “high” growth software company, so I understand the higher valuation.. but 4 times higher on moderately faster growth.. just doesn’t exactly make sense.
Maybe a better comparable is Workday (WDAY) – a company offering software for business functions, seems right up Intuit’s alley.
Workday’s FCF margin is ~18%, less than Intuit’s.
Workday’s 2022 FCF multiple is ~69X, which is about +40% higher than Intuit’s.
Workday is expected to grow revenue around +20% annually, which is marginally higher than Intuit’s +15% expectations.. I mean are you all seeing what I’m seeing?
This one is really interesting to me for two reasons, with the first being the higher valuation over time thing shown in the chart above – that’s so huge and very rare to see. It means an incredibly business is and has been brewing.
But the second interesting thing to me is that this company is generally aligned with their peers, but their stock doesn’t reflect that right now. Yes, it’s up +45% YTD, I see that. I’m not saying in the next 6-18 weeks it won’t experience some sort of pull back.
What I’m saying is, this company seems too risky not to hold.
Intuit has shown time after time with innovation through their product offerings and strategic acquisitions (TurboTax live agents, Credit Karma, and now MailChimp announced this week) that they’re going to do everything in their power to make sure they keep a tight hold on to their market share and will continue to grow it.
This to me means continual rise in valuation and a continual grind higher in revenue. I understand this company isn’t an Upstart or Asana in regards to revenue growth – but that’s not how I’m expecting this company to perform. I expect this company to perform like a Google – a tech company who’s continually innovating and providing value to their shareholders through innovation and a few cash cows that will continue to pay them over the long haul.
Give me a company that moves higher consistently over a 3-5 year time horizon that I’m extremely confident in over a speculative dice roll any day of the week.
Intuit is that. Intuit is this sleeping giant that Wall Street adores, consumers love, and businesses want to work with (financial services and tax professionals).
Kind of extrapolating or FCF multiples out here toward 2023, Intuit will be coming in around $3.6 billion, which means they’re currently trading ~40X that. Workday is currently trading around their ~68X their 2023 FCF expectations and Atlassian is currently trading around ~175X their 2023 FCF expectations.
Here’s the deal, I don’t have a price target here. There’s no real “this is exactly how much I think this company is undervalued” because it’s hard to truly put a value on their defensive moat and their future innovation.
All I know is that their peers, who I admit are growing revenue moderately faster than Intuit, are trading at FCF multiples that blow Intuit out of the water. I’m buying stock in Intuit under the impress and assumption that Intuit’s value in the eyes of the market will continue to expand as shown in the graph above and that they’ll continue to inch closer to their peer’s valuation multiples.
But, if price targets mean a lot to you, Wall Street has them coming in around $640 / share within the next 12 months. I’m comfortable with Intuit stock making up 3-5% of my portfolio in the long term.
Intuit announced just the other day their $12 billion acquisition of MailChimp. This makes complete sense given the company’s continued innovation in the small business setting.
If you weren’t aware, MailChimp is an all-in-one marketing platform for small businesses – with their initial claim to fame being email marketing for Shopify accounts way back in the day.
According to Intuit, this acquisition further drives the company’s mission of becoming an AI-driven expert platform – accelerating their previous strategic initiatives to become the center of small business growth and to disrupt the small business mid-market.
Below are two important call outs from their recent press release breaking down the acquisition –
Together, Intuit and Mailchimp will work to deliver on the vision of an innovative, end-to-end customer growth platform for small and mid-market businesses, allowing them to get their business online, market their business, manage customer relationships, benefit from insights and analytics, get paid, access capital, pay employees, optimize cash flow, be organized and stay compliant, with experts at their fingertips. Delivering on the promise to be the single source of truth, small and mid-market businesses will have the power to combine their customer data from Mailchimp and QuickBooks’ purchase data to get the actionable insights they need to grow and run their businesses with confidence.
Their CEO also chimed in to say:
“We’re focused on powering prosperity around the world for consumers and small businesses. Together, Mailchimp and QuickBooks will help solve small and mid-market businesses’ biggest barriers to growth, getting and retaining customers,” said Sasan Goodarzi, CEO of Intuit.
“Expanding our platform to be at the center of small and mid-market business growth helps them overcome their most important financial challenges. Adding Mailchimp furthers our vision to provide an end-to-end customer growth platform to help our customers grow and run their businesses, putting the power of data in their hands to thrive.”
Looking at MailChimp’s numbers now..
- Global customer reach with 13 million total users globally, 2.4 million monthly active users, and 800K paid customers, with 50% of those customers coming from outside of the USA.
- Data and technology in the form of 70 billion contact, and 250+ rich partner integrations.
- AI-powered automation at scale fuels 2.2 million daily AI-driven predictions.
In hindsight, this acquisition is so obvious.
“MailChimp and QuickBooks will become a powerful engine for small and mid-market business customers to get, engage, and retail their customers, run their business, optimize cash flow and remain compliant.” VP of Small Business and Self-Employed business segment
Here’s why this acquisition was so important for Intuit and why I think it will allow Intuit to continue to expand and deeper penetrate their target market –
Extend Intuit’s QuickBooks platform into the front office marketing, sales and eCommerce categories, representing a ~$45 billion TAM.
Natively integrated digital marketing, eCommerce, and CRM capabilities will add notable feature benefits to QuickBooks Online customers, providing a huge cross sell opportunity into the 6.3 million QuickBooks installed userbase.
Each incremental 1% deeper penetration of MailChimp’s user base filling to paying subscribers represents $80 million in annual subscription revenue for Intuit – huge!
Finally, MailChimp provides a large installed base of free users (over 12 million) for potential upsell as an entry point for the broader QuickBooks suite of small business accounting, payroll and payments solutions.
This acquisition will pay dividends (not literally, but figuratively) for Inuit over the coming years as they upsell to current MailChimp customers and now offer a more full suite to mid-market businesses, expanding their total addressable market.