Intuit Dominates SMB Accounting and Tax Prep - Is It A Buy?

There's been a name on the "tortoise" side of the Green Screens that has intrigued me for some time: Intuit (INTU).

Maybe you've heard of the company or maybe not, but you've almost certainly heard of their 2 main products - QuickBooks and TurboTax. Or maybe you use Mint.com to consolidate your financial picture - that's also Intuit. Ever used Credit Karma to track your credit scores or apply for a loan? Intuit.

You guys know I'm a sucker for business software, particularly software that manages critical and sensitive areas. The accounting books and tax prep certainly fall into these categories.

So, it's only natural that we finally come to a full review of the company, see if the stock is buyable now and - if not - what is a good price to jump in? With no further ado....

The Business of Intuit

Intuit has 4 products: QuickBooks, TurboTax (both consumer and pro versions), Credit Karma, and Mailchimp.

By far the largest is QuickBooks, which together with Mailchimp comprises the Small Business and Self Employed group. This division accounts for about 60% of total company revenues. QuickBooks is an accounting software package for small-to-medium sized businesses (SMBs) and self-employed proprietors, with almost 6 million users. It is largely cloud-based, although desktop versions are still available. Several services are also offered under the QuickBooks umbrella, including payroll solutions, timecard tracking, merchant payment processing, bill pay, and financing services.

Mailchimp, purchased in 2021, is an email marketing campaign and automation tool. Businesses can build mailing lists and set up automated campaigns. Some of those solicitation emails you get every day are likely generated by Mailchimp!

The second division is the Consumer and ProTax groups, generating 30% of sales. This is where TurboTax slots in. TurboTax is tax preparation software that comes in both self-managed (TurboTax Online) and accountant-assisted (TurboTax Live) forms. About 30% of consumers use assisted filing. Mint.com, a platform that aggregates financial accounts for consumers (and makes money through providing a financial ad platform), also falls in this division.

Finally we have Credit Karma, which Intuit purchased back in 2020. Credit Karma's business is kind of similar to Mint.com, except the focus here is on credit. Consumers can sign up to get free credit scores and reports, and receive recommendations for credit cards, loans, and insurance coverage. Intuit receives a commission if any of these offers are taken up. Credit Karma is about 10% of revenue.

The Revenue Model and Growth Potential

Intuit has a solid base of recurring revenues. QuickBooks Online and Mailchimp are cloud software, with per-month subscription pricing on a number of feature/sizing tiers. Mint.com and Credit Karma are both essentially specialized financial advertising platforms, but lucrative ones as the finance space has one of the largest ad profitability rates of any industry. TurboTax is one-off filing software, but has a good recurring user rate (79%) due to users familiarity with it, and its ability to automatically import data, greatly speeding up the process of filing.

All told, that makes Intuit's revenue highly recurring, through the subscription and "toll booth" (ad platform) models.

But what about growth potential?

Despite its size, Intuit is still generating nice growth rates around 15%. It has been able to build on QuickBooks' dominance to forge partnerships with real accountants, and add AI features to its products that allow price increases and features that competitors cannot yet match. The building out of accountant and tax professional networks is an example of how Intuit can leverage its huge user base to make money in new ways. This is a strategy that management wants to continue pursuing.

While this will never be a sustained 20%+ growth company, I see no reason the firm cannot continue to drive 10%+ growth for the foreseeable future.

How Wide Is The Moat?

Wide.

Switching costs are the first moat factor. Any business software used to manage and store critical information is a nightmare to migrate, and there's nothing more critical than a company's finances, accounts, and payroll. There would have to be some serious advantages to switch away from QuickBooks - I just don't see why a SMB would do it. With almost 80% market share, it is practically a standard in SMB accounting.

QuickBooks has a strong network effect. U.S. university students often can get QuickBooks for free. Accounting classes are taught with it, creating a flywheel of new users. Students then go on to become accountants that standardize on QuickBooks. SMBs choose QuickBooks in order to work with these accountants. We see this pattern a lot in software (MS Windows and Office, AutoCAD, Photoshop, etc.), and it creates powerful network effects that dominate industries for decades.

The effect has also begun to expand into Intuit's accounting and tax prep experts network. These experts use Intuit's huge network of users as a marketing base, and in turn those users get an easy way to find professional help. A win-win!

One thing to mention though... QuickBooks is the key asset that Intuit possesses. TurboTax also helps drive advice referrals, but I think it's tough to argue that Credit Karma or Mailchimp provide any kind of durable competitive advantages. Both platforms have a lot of competition in their respective spaces, and barriers to entry are low.

Management and Financials

Intuit is led by Sasan Goodarzi, who took the helm in 2019. He has a 14-year stint at Intuit in many high-level positions, including leading its two largest divisions. Since he took over, the company and stock have performed very well, with revenues and free cash flow doubling, the dividend increasing 71%, and the stock price increasing over 140%.

One concern I do have about Goodarzi's leadership is his tendency towards large acquisitions. Credit Karma was a massive $7 billion dollar purchase, and Mailchimp the next year was nearly $6 billion. 4 years later, Credit Karma is still doing well under $2 billion in revenue (Mailchimp isn't broken out, but it is likely less than that). These were big, over-spend buys for growth, and neither acquisition really enhances Intuit's moat (the opposite, really). As a result, the company's ROI on free cash flow has plummeted from 60% before Goodarzi took over to about 20% today.

I'll categorize Intuit's leadership and financial management as "ok". Certainly the firm remains in strong financial health, with low debt ratios and strong free cash flow (close to 30% FCF margin). But, I would have preferred to see stock buybacks and/or acquisitions that skewed more strategic than empire-building.

Risks

Overall, I think Intuit is a "low" risk pick from the Green Screens, due to its extremely strong economic moats.

There are a few things to watch out for. It is conceivable that one of the large e-commerce or payment providers, like Stripe, Adyen, or Shopify, could expand into the accounting space, challenging QuickBooks' dominance. It could be a natural extension of their businesses and they have a ready-made client base to sell to. This is mostly a theoretical risk at this point, but something to watch out for.

In tax prep, for years investors have been concerned about IRS software superseding TurboTax and its ilk. This has come true to some extent in free filing, but the really profitable users continue to stick with TurboTax. Major tax law simplification could alleviate the need for something like TurboTax but again, this is mostly a theoretical risk and has been for decades.

The two biggest *real* risks investing in Intuit are... (1) buying the stock at too high of a price, and (2) management continuing to blow huge amounts of shareholder capital on more non-strategic, empire-building exercises like Mailchimp and Credit Karma.

Conclusion

Intuit is and has been an undeniably great company, a true "green dot stock", throughout its history. While there are some cracks showing in the facade - mainly self-inflicted through unnecessary acquisitions - it remains a great company today. Its economic moat remains wide, and a new focus on AI and human partnerships is a keen strategy for growth. It has a good future ahead for investors - IF bought at the right price.

What would that price be? Assuming an 11% annual revenue growth rate, a 30.5% free cash flow margin, very modest share dilution, and a lower-than-par 10% discount rate, I get a fair value of $511 for Intuit. The shares currently trade in the mid-$600s, so this one will have to go on the Watch List until we see a better price for it.