High-flying software and tech stocks have taken a beating since reaching highs in the fall of 2021. However, a stock that has experienced a precipitous drop may not make it automatically cheap or undervalued. One company in this category is Intuit Inc. (INTU, Financial), which provides financial and accounting management and compliance products and services for consumers, small businesses, self-employed and accounting professionals on a global basis.
The company operates in four segments. The Small Business and Self-Employed segment provides QuickBooks accounting and bookkeeping services and desktop software solutions, including QuickBooks Online, QuickBooks Enterprise, QuickBooks Self-Employed solution, QuickBooks Commerce, QuickBooks Online Accountant and QuickBooks Accountant Desktop Plus solutions.
The Consumer segment provides TurboTax income tax preparation products and personal finance services. The Credit Karma segment offers consumers with a personal credit monitoring platform that provides personalized recommendations of consumer loans, credit cards and insurance products. The ProConnect segment provides Lacerte, ProSeries and ProFile desktop tax-preparation software products and ProConnect Tax Online tax products, including electronic tax filing. In 2021, the company purchased Mailchimp, an email marketing and contact provider.
Founded in 1983, the company has a current market capitalization of $115 billion and generated $9.6 billion in revenue for the fiscal year ending July 31, 2021.
Financial review
Intuit has definitely been in growth stock mode in recent years with 25% revenue growth in fiscal 2021 and expected revenue growth of approximately 31% in 2022. For the company’s third quarter ending April 30, revenue increased 29% on an organic basis.
QuickBooks Online Accounting revenue grew 32% in the quarter, driven primarily by higher pricing and good customer growth. Credit Karma grew revenue 48% in the quarter, which was driven by strength in personal loans and credit cards applications. The Consumer Group, primarily Turbotax, grew revenue 32%, which primarily reflected the earlier tax deadline this year. ProConnect Group professional tax revenue grew almost 10% to $258 million in the quarter compared to $235 million in the prior-year period.
Operating income increased 25% during the quarter and earnings per share increased 18.1% to $6.28. The difference between the two growth rates can be attributed to a higher tax rate and increased fully diluted share count. The company provides a non-GAAP earnings figure of $7.65 per share with the primary difference being $1.21 in stock compensation. However, stock compensation is a real expense and investors should not eliminate it from earnings calculations.
Intuit typically has a stellar balance sheet, but in the past nine months, the company added $4.7 billion in new debt to finance the acquisition of Mailchimp. Nonetheless, Intuit typically generates strong levels of free cash flow and is not highly levered at this time. As of the end of the third quarter, the company has total cash and investments of approximately $3.9 billion and debt of $6.8 billion. With expected Ebitda of $4.6 billion this year, the company can easily manage its debt load. In addition, during the quarter, the company repurchased $489 million worth of shares and still has $2 billion remaining on the company's share repurchase authorization.
Mailchimp
In September 2021, Intuit agreed to acquire Mailchimp, an email marketing platform for small and mid-market businesses. The company has a customer base of approximately 2.4 million users and most investors have probably seen a Mailchimp-based email in their inbox at some point. Constant Contact is a major competitor and one of the original innovators in the space, but Mailchimp has grown to a dominant market share position.
The total acquisition value of $12 billion was roughly split between cash and Intuit shares. With estimated Mailchimp revenue of below $1 billion, this was an expensive acquisition. There are, of course, cross-selling opportunities to increase revenue across all Intuit business segments, but write-downs should be expected as the economy slows and small businesses suffer economic distress. Goodwill increased by $8.1 billion from the prior year period and acquired intangible assets increased by almost $4 billion, which were related to the Mailchimp acquisition. Those intangible assets likely will not hold in coming years.
Valuation
Analysts' consensus earnings per share estimates for the fiscal year ending July 2022 were $11.75, but those are non-GAAP estimates, which typically exclude stock-base compensation. GAAP earnings estimates are approximately $7 per share, which is in line with company guidance.
That puts Intuit's stock trading at 58 times current fiscal year earnings. Looking forward at 2023 fiscal year earnings per share estimates, the story improves slightly with the stock trading at roughly 48 times estimated earnings. The company’s enterprise value-Ebitda ratio is also excessive at 20 times when averaging current and next year's estimated Ebitda.
Utilizing the GuruFocus discounted cash flow calculation with GAAP earnings of $7 and a generous 15% long-term growth rate, the value comes out to roughly $210, or close to 50% below today's price. Even using a non-GAAP earnings per share estimate of $11.72 and the same growth rates, the value comes out to approximately $350, still well below today's price.
Guru trades
Gurus who have purchased Intuit stock recently include Frank Sands (Trades, Portfolio) and Ray Dalio (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Catherine Wood (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio).
Conclusion
Despite the 41% drop in Intuit's share price from its 2021 highs, the stock appears to be substantially overvalued at this time. There is no margin of safety to account for a small business recession or broad-based economic downturn. There will always be a market for Intuit's personal finance and small business products, but at what levels remains a key question.
