When it comes to large players in the financial technology space, one of the most notable to pay attention to is Intuit (NASDAQ: INTU). This conglomerate, which owns a variety of leading software programs and platforms, has achieved rapid growth in recent years. Add on top of this that cash flows have followed the same trajectory that revenue has, and you have a true growth machine in the works. Given these uncertain times, it’s understandable why investors would be wary of rapidly growing companies that trade at rather lofty multiples. The simple thought of missing analysts’ expectations can be horrifying given the ramifications it can have. And with the management team at Intuit set to report financial results covering the first quarter of its 2023 fiscal year coming up, the tension is almost palpable. Heading into this earnings release, the company does look to be rather robust. But when factoring in just how pricey shares are, I do believe that it makes for a better ‘hold’ prospect than anything else.
If you don’t know Intuit by its corporate name, odds are you are at least aware of one of its products. Over the years, the company has grown to become a multifaceted player dedicated to helping consumers and small businesses through the financial management, compliance, and marketing products and services the firm offers. It also provides specialized tax products to the accounting profession. The company achieves all of this through its global technology platform that includes offerings such as TurboTax, Credit Karma, QuickBooks, Mailchimp and more.
Operationally speaking, Intuit is organized into four different segments. The first of these is the Small Business & Self-Employed segment. According to management, this unit focuses on small businesses and self-employed individuals, as well as the accounting professionals who assist and advise them. Specific offerings here include QuickBooks and Mailchimp, with the former providing financial and business management online services, payroll solutions, time tracking, merchant payment processing solutions, and so much more. The latter, meanwhile, includes e-commerce, marketing automation, and customer relationship management services. This segment is the real heart and soul of the company, accounting for 50.8% of its revenue and 50.7% of its profits during the 2022 fiscal year.
Next in line, we have the Consumer segment, which serves consumers and offers do-it-yourself and assisted TurboTax income tax preparation products and services sold throughout the US and Canada. The company also has a personal finance offering that helps customers track their finances and daily financial behaviors that they call Mint. This particular unit was responsible for 30.8% of the company’s revenue and 36% of its profits last year. Credit Karma is the third segment. Through this, the company provides consumers with a personal finance platform that offers personalized recommendations for credit cards, home loans, auto loans, personal loans, and more. It also helps them to access their credit scores and reports and engage in other related activities. This unit accounted for 14.2% of the company’s revenue but only 7.7% of its profits. And finally, we have ProConnect. This portion of the enterprise service professional accountants with a variety of offerings such as Lacerte, ProSeries, ProConnect, Tax Online, and more. Last year, this segment accounted for 4.2% of the company’s revenue and 5.6% of its profits.
Over the past five years, the management team at Intuit has done a stellar job growing the company’s top line. Revenue grew from $6.03 billion in 2018 to $9.63 billion in 2021. In 2022, revenue surged, climbing by 32.1% to $12.73 billion. This increase, management said, was driven by a variety of factors. For instance, the Small Business & Self-Employed segment of the firm saw revenue jump by 38%, driven largely by expansion associated with its Online Ecosystem operations that included $762 million from Mailchimp. Consumer segment revenue grew by 10% thanks mostly to a shift in mix to the company’s higher-priced product offerings. The company also benefited nicely from a $940 million increase associated with Credit Karma that was caused in large part by the timing of the firm’s acquisition of that asset.
With the increase in revenue has also come a nice improvement in profitability. The company went from generating net profits of $1.33 billion in 2018 to $2.07 billion in 2022. Of course, other profitability metrics have followed suit. Operating cash flow, for instance, jumped from $2.11 billion to $3.89 billion over the same five-year window. Meanwhile, EBITDA for the company also improved, rising from just under $1.80 billion to $3.24 billion.
Although this growth has been stellar in the grand scheme of things, current economic conditions may make investors worry about the future of the enterprise. Naturally, the best time to gauge how things are going is when the company reports financial results covering one of the four quarters it has each year. Fortunately for shareholders and market watchers alike, that time for the first quarter of its 2023 fiscal year is coming up on November 29th after the market closes. Leading into that time, analysts have some expectations. For starters, revenue is forecast to be around $2.50 billion. Truth be told, it’s highly probable that management will hit that number or come awfully close to it. After all, on November 1st of this year, the company stated that it expects first quarter results to be higher than management previously anticipated. Previous guidance called for revenue of between $2.478 billion and $2.513 billion. At the midpoint, that would come in at the $2.50 billion mark. It would also translate to a year-over-year growth rate of between 23% and 25%, inclusive of Mailchimp.
On the bottom line, analysts are anticipating a loss per share of around $0.40, with an adjusted profit per share of $1.20. Most of that disparity can be chalked up to share-based compensation and two different types of amortization. So at the end of the day, this adjusted figure is much more akin in nature to operating cash flow. But just as was the case with revenue, management offered their own guidance. They currently think that the loss per share should be between $0.37 and $0.43. Meanwhile, the adjusted profit per share should be between $1.14 and $1.20.
When it comes to the 2023 fiscal year in its entirety, management expects profits per share to be between $6.92 and $7.22. At the midpoint, that would imply a net income of $2.01 billion. That’s slightly below what the company achieved in 2022. On the other hand, the adjusted earnings per share should be between $13.59 and $13.89. That translates to a year-over-year growth rate of between 15% and 17%. Given the similarity this metric has to the company’s cash flow, I decided to assume that both cash flow and EBITDA will increase at the same rate. That would translate to adjusted operating cash flow this year of $4.51 billion and to EBITDA of $3.76 billion.
Based on these figures, the company is trading at a forward price-to-earnings multiple of 52.6. The price to adjusted operating cash flow multiple is considerably lower but still expensive at 23.4. And the EV to EBITDA multiple should be around 29.1. As you can see in the chart above, the company is cheaper on a forward basis using two of the three metrics, while being more expensive using the other one. As part of my analysis, I also compared the enterprise to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 33.1 to a high of 281.6. In this case, four of the five companies were cheaper than our prospect. Using the price to operating cash flow approach, the range was between 14.7 and 30.6. In this case, two of the five companies were cheaper than Intuit. And when it comes to the EV to EBITDA approach, the range was from 16.7 to 38.7. In this scenario, three of the five companies were cheaper than our target.
Company Price / Earnings Price / Operating Cash Flow EV / EBITDA Intuit 52.6 23.4 29.1 SAP SE (SAP) 36.8 25.1 16.7 Salesforce (CRM) 281.6 23.8 38.7 Adobe (ADBE) 33.1 21.0 22.0 Synopsys (SNPS) 50.8 30.6 36.6 PayPal (PYPL) 41.0 14.7 20.0 Click to enlarge
At this point in time, I have no doubt that Intuit is a fantastic company with a bright future. Management has demonstrated a fantastic ability to grow, both organically and through acquisitions. Long term, I suspect that the company will continue to expand at a nice pace and will, at the same time, generate significant value for shareholders. Having said that, shares do look rather lofty on an absolute basis and, relative to similar firms, they look more or less fairly valued. My opinion on the matter could change if the company truly does exceed financial results currently anticipated when they announce data for the first quarter of 2023. But until that data comes out, I cannot rate the company any higher than a ‘hold’ right now.