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Why is Intuit an Ideal Investment Choice in Small Business Space.

June 30, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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It is true that a small business owner wears many hats as he is responsible for performing myriad functions like finance, marketing, human resource management etc. that support the business. Hence, it is quite a relief for small businesses to get tools that can help them execute these functions with ease, an idea that is being pursued by Intuit (INTU).

Commendable quarter

The second quarter earnings call clearly highlighted Intuit’s focus on expansion of QuickBooks online and its commitment to improve the product via sustainable innovation. In fact, the online subscribers for QuickBooks, increased by a whopping 30% in the second quarter. Besides the mentioned growth, the company has approximately 46000 subscribers outside the U.S that implies almost 100% growth over the last year. Clearly, Intuit is working hard to migrate its customers to the new version of QuickBooks on the cloud as it promises a score of additional features.

It is important to acknowledge Intuit’s targeted efforts at building its products for small businesses and marketing it appropriately. For instance, one of the latest press release from the company on QuickBooks payments highlights an indispensable need for medium-sized businesses i.e getting paid faster.

Besides QuickBooks, Demandforce subscribers also grew 30% providing more credibility to Intuit’s vision of becoming an operating system for small businesses. As such, the company is expecting a double-digit revenue growth in the SMB segment.

TurboTax: The consumer tax champion

While Intuit’s SMB segment is progressing aptly, the company is a hit among investors and customers mainly because of its tax preparation software, TurboTax. This high-utility software from the company has been a boon to people filing their own taxes. Let us take a quick look at the numbers for TurboTax after the first peak season. The sales of TurboTax online units grew 11% versus the comparable prior year period whereas sales of federal units grew 7% year-to-date through February 15.

Intuit has delivered robust product innovations for filers with simple returns and also designed a new marketing campaign that positions TurboTax as the champion of do-it-yourself tax filers. These actions have led to an increase in the penetration of TurboTax software and the company expects consumer Tax segment to grow revenue at 4 to 5 percent in fiscal 2014. Besides making big strides in online computing, Intuit has also gone mobile. SnapTax, a mobile tax offering by the company that comes at an all-in price of $15, has been received quite well by simple filers.

Industry peers

One of Intuit’s fiercest competitors in the industry is H&R Block (HRB) whose tax preparation software is also based on do-it-yourself approach. If we look at the products offered by both of these companies in the personal and small business taxes domain, the differentiation is by no means, humungous. However, Intuit enjoys a better brand equity in U.S and Canada because of its robust online presence and hassle-free customer experience.

A major threat facing these companies is simplification of tax preparation by the U.S Government because it would hurt their customer base significantly. Though these companies charge minimal prices for the use of their software yet a change in process of filing tax returns could take away a considerable set of customers.

H&R Block's continuing misses

Of late, H&R Block has been missing Street expectations in terms of earnings because of heavy competition in the market. As a result, the stock price has experienced significant volatility on the exchange over the past year. Additionally, H&R Block is an expensive bargain at a P/E of around 37.50 and a price-to book value ratio of 12.3. Considering that the company’s primary revenue channel i.e tax services is faced with heavy competition, the stock could go for a correction.

Is JTH Holdings a threat?

Besides these two companies, JTH Holdings (TAX), the parent company of Liberty Tax service is a also a considerable player in tax preparation domain. For the third quarter of fiscal 2014, JTH Holdings posted a net income of 28 cents per share as compared to 12 cents per share in the year ago period. Additionally, the revenue grew 8.3% y-o-y as a result of an increase in average net fees and market share.

JTH Holdings did a commendable job is the first half of the tax season as it increased its customer base by 7.7% in the U.S during the calendar year to February 28. It is important to understand that Intuit and JTH holdings have different business models when it comes to providing tax services. While the former has adopted a Do-It-Yourself approach in filing of taxes, the latter has built franchises over time for e-filing of customer taxes. Hence, it would be difficult for JTH holdings to catch up with Intuit in terms of customer base.

However, when it comes to recent performance, JTH Holdings worked hard to provide efficient services to its customers. For instance, some franchises were open 24/7 so that people could file returns quickly and at their own convenience. If the company can put up with this level of customer service then it could imply a reasonable threat bell for Intuit’s market share in coming years.

Takeaway

The fact that tax preparation domain offers seasonal revenue opportunities sparks the need to have an alternative revenue generating segment for the companies. That being the case, Intuit’s vision to establish itself as a small business operating system seems fairly adequate. Also, the positive numbers in this segment indicate a possibility of a sustainable high-revenue space that could pop up massive opportunities in future.

The anticipated tax reforms by U.S government and heavy competition continue to threaten the tax prep industry and thus, it is prudent to expand into becoming a business ecosystem rather than being constrained in one particular domain. Intuit possesses the ability to become the backbone of small businesses and deliver solid results to investors in the coming years.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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