Intuit: Confident That EPS Can Be Sustained In The High-Teens Range

Investment action

I recommended a buy rating for Intuit (NASDAQ:INTU) when I wrote about it earlier this year, as INTU performed better than expected and showed positive traction in the mid-market segment, which led me to think that earnings growth could accelerate to a high-teen percentage. Based on my current outlook and analysis, I recommend a buy rating. My key update to my thesis is that I expect higher EPS growth ahead given the strong set of results and the very encouraging progress that INTU has made with its investments. The drop in share price has also made the potential upside situation more attractive.

Review

INTU reported 3Q24 earnings on the 23^rd of May, where it saw its revenue grow 11.9% to $6.737 billion, beating consensus estimates of $6.644 billion, and pro-forma EBIT of $3.702 billion at a 55% margin, which also beat consensus estimates of $3.602 billion. Strength was displayed across all segments: Small Business & Self-Employed grew 18.7% to $2.387 billion; Consumer Group grew 9.3% to $3.653B; Credit Karma grew 8% to $443 million; and ProTax Group grew 3.3% to $354M. In my opinion, this was a very strong set of results that supports my view of the business.

However, it appears that the market is not fond of this performance as INTU saw its share price drop by >10%, and I think the reason is because Small Business Online Services (includes QuickBooks Online [QBO] Payroll, QBO payments, Mailchimp, etc.) growth slowed from 24% in 2Q24 to 20% in 3Q24, and with the Desktop subscription (the one supporting segment performance in 3Q24) transition expected to end this year, it suggests potential for further deceleration in FY25. However, I think the market might have overlooked the fact that despite a weak macro climate, the overall small business segment grew 18%, and as inflation moves in the right direction, the chances for rates to come down in 2025 get higher, which should turn the current macro headwind into a tailwind for INTU, thereby supporting demand.

On top of the upcoming macro tailwind, INTU is also pouring resources into expanding the solution to include front-office tools like MailChimp and more upmarket options like QuickBooks Online Advanced, and I am very positive on these investments given the uptake so far. Take Mailchimp Solution, for instance. The product continues to show very positive growth rates, 13% in 3Q24, despite the tough comps last year due to the price increases enacted in 2023. QBO also continues to grow in high teens, showing little signs of weakness in this macro environment. I am expecting growth to continue at a very healthy rate ahead and believe there is potential for acceleration in FY25 as INTU reaps the benefits from its generative-AI investments, which have seen very strong adoption rates across both products: More than 300,000 MailChimp users have access to the latest Generative-AI features, while 30,000 QB users have used the beta version of these features.

Now that I have addressed the bearish point that I believed impacted the share price, it is worth taking time to also talk about the success that INTU had in penetrating the upmarket segment—a key driver of growth that I had identified previously. To recap, the total tax preparation market is worth ~$35 billion (as per the 3Q24 earnings call), and of that $35 billion, $31 billion is for the assisted category and business tax (the remaining is DIY). Which means there is little room for INTU to continue capturing share since, in the last twelve months, TurboTax revenue performance has been around $4.46 billion (most of it in the DIY segment, which is close to 100% of the addressable market). Hence, it makes sense for INTU to invest and penetrate the upmarket, which has seen very encouraging adoption rates. So far, the number of customers using TurboTax Live Full Assist has doubled, and the number of customers who are new to the platform has tripled. Although this is just a starting point, with INTU experience in dealing with taxes and a strong brand name in the states, I am confident that they can continue driving more gains here as they step up on marketing, which has been specifically called out by management as they are going to make these investments.

And two, visited a number of customers and partners. And we’re being very aggressive with our approach in what we’ve done with the platform, what we’re doing with our pricing, and then the marketing investments that we are making as we look ahead. 3Q24 call

Valuation

After the share price decline, I believe the upside is more attractive today than prior. Unlike the bears that are focused on the fact that small business online services slowed, I think the overall results and outlook remain positive, and the fact that management increased its FY24 EPS guide is a strong positive sign, which is in line with my view that earnings growth can grow to a high-teen percentage range. My view is that with the potential economic recovery in FY25, growing adoption of Mailchimp and QBO (due to the investments in generative AI), and continuous traction in penetrating the upmarket in the tax preparation market, INTU should continue to see high-teen growth.

INTU was trading at 36x forward PE before the drop in share price, and with all the positive signs I am seeing, I believe INTU could trade back up to 36x when it shows the market that it can continue to grow as guided and earnings growth can sustain at the high-teens percentage level. At 36x, this translates to a target share price of $850, or 40% upside. However, even if we don’t see an upside re-rating, at the current 32.5x forward PE, the upside is still relatively attractive.

Risk

A further slowdown in small business online services in the coming quarters could spark a bigger negative sentiment on the stock as it gives further evidence that INTU is seeing demand weakness. Moreover, it is not guaranteed that 2025 will see a macro-recovery. Inflation has proven to be stickier than expected, and if this persists, we could see rates staying higher for longer, which could hurt the health of INTU’s targeted customer base.

Final thoughts

My recommendation is a buy. Strong overall results across all segments and a management-guided EPS increase for FY24 support the view of high-teen earnings growth potential. INTU investments into generative-AI and assisted tax services product should support this earnings growth outlook ahead. A potential economic recovery in FY25 also bode well for growth ahead. Lastly, after the share price decline, I believe the current valuation offers attractive upside even without a multiple expansion.