Intuit Inc. (INTU, Financial), the California-based financial software company known for its QuickBooks and TurboTax applications, delivered stellar first-quarter 2020 results on Thursday, beating analyst expectations on all fronts.
Despite a strong financial performance coupled with international growth and some exciting new launches, the company’s stock has consistently stayed within the range of $240 to $290 since March. Shareholders of the company are sure to be curious as to why the stock has been rangebound despite the solid financial performance, and whether the reason behind that is the high valuation multiples.
Strong results, but a conservative outlook
Intuit’s quarterly revenue grew by as much as 15% to $1.17 billion, beating Wall Street's consensus estimate of $1.13 billion. Sales were largely driven by 15% growth in the Small Businesses and Self-Employed Customers segment, which accounted for $1 billion of the top line. Within this segment, QuickBooks Online alone grew by as much as 41% as more and more startups and small businesses across the globe showed a preference for using the product in order to maintain their accounting records. In fact, nearly 60% of the online revenues came from international subscribers, and Intuit went on to become the number one player for cloud accounting subscribers in the U.K. Even the QuickBooks online payment and payroll applications grew by 27% from the prior-year quarter.Â
On the profit front, Intuit outperformed for the fifth consecutive quarter, delivering earnings of 41 cents per share, significantly beating the consensus estimate of 25 cents per share. Management's guidance, however, was relatively conservative as it projected total revenue ranging from $7.44 billion to $7.54 billion for full fiscal 2020, implying a lower growth rate of 11% to 13%. The earnings per share outlook for the year is between 70 cents and 73 cents, which is again on the lower side. This is probably the reason why the market did not respond too positively to the results.
Formidable new features on QuickBooks and Turbo to increase user base
During the quarter, Intuit also had its fair share of new launches in terms of products and features. The company launched QuickBooks Live to help connect small businesses with live experts for more convenient use and better problem-solving. Its new cash flow planner functionality within QuickBooks is a blessing for startups that constantly face the risk of running into negative bank balances.
The company also introduced a key feature within its Turbo application that helps customers monitor and improve their credit scores to increase their loan eligibility.
Features like these are the reason for the phenomenal subscriber growth of Intuit’s products, particularly QuickBooks, which is becoming the go-to accounting software for most modern-day startups around the world. The management team's efforts toward increasing the integration of artificial intelligence into its offerings are also going to be a strongly positive factor going forward.
Why is Intuit’s stock rangebound?
In the price chart above, it is evident that Intuit’s stock showed good appreciation in the first quarter of the year, but became mostly rangebound in March.
As a fast-growing enterprise software solutions provider with a global market, Intuit has been consistently beating analyst estimates for five quarters. Despite not having a single bad quarter, there was a strong amount of profit-taking in the month of April and there was a sharp decline in the enterprise value-to-Ebitda multiple, from a high of 36 to around 28 in the month that followed. Similarly, the enterprise value-to-revenue multiple had risen to as much as 11, but it also came down.
While Intuit’s growth story has been formidable, there had to be a point where the multiple expansion would stop. It appears that April was the inflection point. Since then, the company’s enterprise value-to-Ebitda has stayed close to the 30 times mark, whereas the enterprise value-to-revenue multiple has been solid around 10. What does this imply? The market perceived the 36 times Ebitda level to be highly overvalued, causing the profit-taking. Now, it is clear that future appreciation of the share price will have to be driven purely by the financial results of the company and not by multiple expansion caused by improving market perception.
Key takeaways
Intuit has created good value for shareholders through price appreciation as well as its yield. The recent $113 million buyback and the 13% increase in the dividend to about 53 cents per share prove management is not just reinvesting, but also rewarding its shareholders. The conservative outlook and limited response to the strong quarterly results, however, is certainly a point of concern. Intuit is undoubtedly a solid company in terms of fundamentals, but whether the stock is able to cross the $290 barrier and deliver any kind of near-term appreciation in the current fiscal year is yet to be seen.
Disclosure: No positions.
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