Introduction: Why is the stock eliminated?
We are reviewing our investment status in Intuit Inc. (INTU) after its share price fell below $600 for the first time since October 2021 on Wednesday (January 5). INTU shares are now down 18% since their 52-week high in November.
Intuit stock has fallen as sentiment has turned against “expensive” tech stocks in the past few months. The Nasdaq is also down 6.1% from its November peak, and Intuit is starting with relatively high valuation multiples. The minutes of the Federal Reserve’s meeting were released on Wednesday, indicating that interest rates are rising faster and faster, adding to the weakness in technology stocks.
We started our buy rating on Intuit in September 2019. Even after the latest correction, Intuit stock has gained 120% (with dividends) in just under 2.5 years, including a 70% gain through 2021:
Librarian Capital’s Intuit rating history vs. stock price (last year)
Source: Alpha Search (06 Jan 22).
Key developments since our last update in August 2021 include:
- Acquisition of Mailchimp (announced September 13)
- Intuit’s Annual Investor Day (September 30th)
- Announcement of results for the first quarter of the fiscal year 22 (November 18)
As we’ll explain, these show that Intuit’s structural growth remains strong, and double-digit EPS growth is likely to continue. We believe Intuit stock is trading at just over 50x P/E on a pro forma basis. Our forecast shows a total return of 25% (8.0% annually) by July 2025, which is lower than our typical requirement but still attractive given Intuit’s earnings resilience and strong potential.
Intuit purchase status summary
Intuit is one of the strongest companies in our coverage, providing mission-critical software and services (with accounting and tax at its core) to small businesses and consumers in the US and select international markets, based on a largely recurring revenue model (including with subscriptions).
Intuit is also a platform company, with strong economies of scale, operating leverage and cross-selling. Under its “One Intuit Ecosystem” strategy since 2017, the department has made data flow through its platform as well as opened it up to third-party operators, creating a robust ecosystem of applications, data analytics, and referrals:
One Ecosystem (As of 2018)
Source: Intuit Investor Day presentation (September-18).
Intuit has targeted, and has historically achieved, double-digit revenue growth and an expanded EBIT margin. We believe this will continue into the future:
Intuit Group Revenue Growth and EBIT Margin (FY13-21)
Noticeable. FY21 revenue growth does not include Credit Karma. Source: Intuit filings.
At the time of our inception, for fiscal year 2019 financial statements, Intuit shares were trading at 39.2x P/E and a 2.6% Free Cash Flow (“FCF”) return. We have assumed a P/E exit at 42.0x since November 2020. At a 52-week high of $716.86, the P/E was approx. 62 times the EPS for fiscal year 22.
We believe recent developments have continued to support our buying case.
Get Mailchimp to add marketing tools
The acquisition of Mailchimp helped our purchase case, which was announced on September 13 and completed on November 1.
Mailchimp is a digital marketing platform for small and medium businesses (“SMBs”) that allows them to control all aspects of online marketing, CRM, and new customer acquisition. Founded in 2001, it had 13 million global users (including 2.4 million monthly active users and 0.8 million paying customers), and approx. $800 million in revenue in 2020 (20% increase year over year, over 50% from outside the US).
The addition of Mailchimp marketing tools will expand Intuit’s existing offerings in the areas of accounting, payments and human capital management:
Intuit believes Mailchimp will add more than $30 billion to its total addressable market, reaching $260 billion globally.
The consideration of $12 billion was paid 50/50 in securities and cash, with the equity component paid in new shares issued at $562.61, and the cash component was partially funded by a new $4.7 billion loan.
Mailchimp will continue to operate under its own brand but will become part of the Intuit Small Business and Self-Employed Division (“SBSE”). Management expects the acquisition to be accrued with non-GAAP EPS in fiscal year 22.
Investor Day emphasized long-term goals
Our buy case is backed by our Annual Investor Day on September 30th.
Management reaffirmed the long-term outlook for double-digit revenue growth, driven by both consumer numbers and average revenue per customer (“ARPC”), and EBIT margin expansion over time, with flat gross margin and different OpEx margin flat down. by the time:
Management has also provided long-term revenue growth targets by segment:
- SBSE: 10-15% annual revenue growth (unchanged)
- Consumer: 8-12% annual revenue growth (unchanged)
- Credit Karma: 20-25% annual revenue growth (new)
The main drivers of revenue growth in each segment are explained below:
Intuitive long-term revenue growth forecast by sector
Source: Intuit Investor Day Presentation (Sep-21).
We expect Intuit to achieve these revenue growth targets.
Continued recovery in the first quarter of fiscal year 22
Our FY22 first-quarter results, released on November 18, also supported our buying case.
The main items for profit and loss for the first quarter of fiscal year 22 for Intuit are shown below. SBSE is the only segment with a meaningful year-on-year comparison, because consumer revenue has traditionally been concentrated in the third quarter (due to tax filing deadlines) and Credit Karma (acquired in December 2020) was not included in the prior year:
SBSE Revenue grew 22.2% year-over-year, with the recovery from the negative impact of COVID-19 continuing into FY20 (roughly from Q3FY20 to Q2FY21):
SBSE Revenue Growth Sensing (since FY18)
Source: Intuit filings.
SBSE’s total online ecosystem revenue growth of 36% is more than achieving Intuit’s long-term goal of 30%. International online revenue grew faster, at 39% on a constant currency basis, although markets outside the US recovered more slowly than the US, reflecting still lower penetration outside the US
Karma credit Revenue hit another record high in the first quarter of FY22, with revenue coming in at $418 million positively compared to $1.1 billion in FY21 and $0.9 billion in FY 2020 (on a pro forma basis). The growth was driven by a combination of macro rebounds (banks reduced their lending due to COVID-19), the integration of Credit Karma with TurboTax last season, and more product innovations that attracted more users and financial institutions.
Rising organic growth and fiscal outlook for 22
As part of its first-quarter results, Intuit raised its guidance for fiscal year 22, raising organic growth rates and also including Mailchimp as part of its full-year outlook. Non-GAAP FY22 EPS is now expected to be $11.48-11.64 (from $11.05 to $11.25):
Intuit guidance for fiscal year 22 (updated)
Noticeable. Actual routing is highlighted in blue. Karma credit growth rates are pro forma.
Source: Intuit results release (first quarter FY22), Librarian Capital.
The expected revenue growth rates for various sectors include:
- SBSE growth is now 32-33%, including organic growth of 16-17% (it was 12-14%) and Mailchimp revenue of $760-770 million (newly acquired)
- Consumer growth 10-11% (unchanged)
- Karma credit growth 35-37% (was 18-21%)
- ProConnect revenue growth 1-2% (unchanged)
The non-GAAP expected margin includes EBIT of approx. 80 basis points of negative impact from the Mailchimp acquisition, including planned “active” investments. Management expects “margin to continue to expand from this new level over time.”
Valuation – Have the shares been overvalued?
At $586.39, compared to the initial fiscal year 22 EPS, we believe Intuit is trading at a price-to-earnings multiple of just over 50x.
No EPS reported for fiscal year 21 or directed EPS for fiscal year 22 fully reflects the newly acquired Credit Karma and Mailchimp business: fiscal year 21 included less than 8 months of Credit Karma and no contribution from Mailchimp, while fiscal year includes 22 full years of Credit Karma but only three quarters of Mailchimp.
If we were however to use the FY22 EPS geared range, the implied P/E multiple would be 50.4-51.1x; Similarly, if we were to use the reported FY21 EPS, the implied P/E multiple would be 61.1 times:
Intuit Earnings, Cash Flows and Valuation (FY18-21)
Noticeable. Fiscal Year 21 includes just over two quarters of Credit Karma’s contribution.
Source: Intuit filings.
The P/E multiple is well above the 42.0x we assumed for Intuit’s P/E exit in FY 25. However, we believe that whether a stock is “overvalued” is not determined by current P/E, but by An investor’s expected returns from its current price (more below) – From this perspective, Intuit’s stock is not overvalued.
Intuit has a dividend yield of 0.5%, from a dividend of $0.68 per quarter ($2.72 annually), which was up 15% at the time of its fiscal year 21 results.
Intuit repurchased another $339 million of its stock during the first quarter of FY22, and “aims to be in the market every quarter” with more buybacks. Management aims to use buybacks, as a ‘minimum’, to offset the dilution of stock-based compensation over a 3-year period.
Intuit stock forecast
We have updated our forecasts with the FY22 guidance raised but kept other assumptions unchanged:
- FY22 EPS is $11.56 (was $11.15), the midpoint of the new guidance
- In fiscal years 23 and 24, net income growth of 16.0% annually
- In fiscal year 25, net income growth of 12.5%
- From the 22nd fiscal year, the number of shares has been reduced by 0.8% every year
- As of fiscal year 23, dividends must be based on a 25% payout ratio.
- P/E 42 times at the end of fiscal year 25 (July 2025)
As before, net income growth of 16.0% in both fiscal years 2013 and 24 equates to a sum of 12.5% organic growth and 3.5% Credit Karma, which translates to 7% interest earnings per share from Credit Karma spread over two years. (We have conservatively assumed that Mailchimp is not useful at the moment.)
The 42x P/E ratio reflects Intuit’s proven resilience during downturns and the long-term CAGR of adolescents, still conservatively representing a significant downgrade from roughly the current rate. 50x price/price
Our new FY25 EPS forecast of $17.93 4% higher than before ($17.29):
Illustration expecting the return of Intuit
Source: Desktop Capital Estimates.
With shares at $586.39, we expect an exit price of $753 and a total return of 25% (8.0% annually) by July 2025, in just over 3.5 years.
While the 8.0% annualized return is less than the 10% we typically call for, we’re excluding Intuit due to its proven resilience during a pandemic and strong long-term potential. Additionally, because the price-to-earnings rating is a one-off, the annualized return should trend toward Intuit’s low-term teen EPS growth as we extend the forecast period.
Do you buy Intuit stock? conclusion
Intuit stock fell below $600 for the first time since October 2021, and is now 18% below its 52-week high in November.
Stocks just over 50 times the initial FY22 EPS. Even assuming an additional downgrade of 42x, we think it could be a good investment.
The $12 billion acquisition of Mailchimp expands the Intuit platform into marketing tools, significantly expanding the addressable market.
Intuit reaffirmed long-term goals, which means double the earnings per share growth. Fiscal Year 22 results for the first quarter were strong and lifted prospects.
With shares at $586.39, we expect a total return of 25% (8.0% annually) by July 2025, and attractive risk/reward remains.
We reaffirm our buy rating on the Intuit Inc. stock.