Wall Street Is Underestimating This Tax-Software Giant's Strength
It's one thing that Americans can count on like clockwork... tax day.
Every year, millions of Americans must file their income taxes. Usually the deadline falls in April. But things have looked different these past couple of years...
With the pandemic grabbing hold in 2020, the government delayed the tax-filing deadline until July. It wanted to give people as much time as possible amidst the confusion and uncertainty.
Like last year, the deadline to file taxes was delayed in 2021. This time, it was only extended a month, to May 17.
That briefly disrupted operations for today's company. But no matter when people file their taxes, there's a good chance that they're using software from Intuit (Nasdaq: INTU)...
Intuit supplies financial management and compliance products and services to individuals, small businesses, and professional accountants. It has three main business segments: Small Business & Self-Employed (QuickBooks), Consumer (TurboTax), and Strategic Partner (ProConnect Tax Online).
QuickBooks and TurboTax are its two largest revenue sources – making up 40% and 52% of revenue, respectively.
These businesses help Intuit dominate the at-home tax-filing business. According to estimates from Henry Ellenbogen, chief investment officer and managing partner of Durable Capital Partners, Intuit's TurboTax and QuickBooks businesses have about 70% of the market share in their respective segments.
And these products are "sticky." That means if someone uses them once, they're going to keep using them. That's especially true with tax software – where people have to use Intuit's products at least once a year. This means Intuit has steady, recurring revenue.
Selling tax software is also a highly capital-efficient business... You see, software is almost an infinitely scalable business. Companies like Intuit don't need to pay more to deliver each unit of sales. So it doesn't need to build factories or maintain expensive industrial equipment.
One of our favorite ways to determine capital efficiency is through free cash flow ("FCF"). Put simply, FCF is the amount of cash left over after all expenses and capex.
Over the last 12 months, Intuit generated about $2.9 billion in FCF. On sales of $8.9 billion over the same period, that comes out to a FCF margin (FCF divided by total sales) of 33%. So for every dollar in sales that Intuit has, it produces $0.33 in FCF.
For comparison, the average S&P 500 company has a FCF margin of 12.5%. So Intuit brings in nearly three times the FCF per dollar of sales than the average company.
In May, Intuit released its preliminary third-quarter report. It said the one-month delay in tax filing would hurt third-quarter numbers. But Intuit had an even better quarter than it expected...
The company reported third-quarter earnings per share ("EPS") of $6.07. That was above Intuit's preliminary third-quarter EPS of $6.00 to $6.05, but below Wall Street's estimate of $6.29. Revenue for the quarter was $4.17 billion, in line with the preliminary third-quarter report but below the expectation of $4.27 billion.
So while the third quarter came in below Wall Street estimates, it's likely they weren't adjusted to account for the new guidance.
But the delay will boost Intuit's fourth quarter...
The company sees fourth-quarter EPS of $1.55 to $1.60, well above the Wall Street estimate of $0.35. And it forecasts revenue growth of 26% to 28%, versus the expectation for a decline of 0.4%.
For the full fiscal year (which ends in July), Intuit raised its EPS forecast to a range of $9.32 to $9.37 versus the previous guidance of the high end of $8.20 to $8.40. That's above the Wall Street estimate of $8.47.
For the full year, Intuit expects TurboTax units to grow 6%. It also forecasts TurboTax Live customers – which gives access to real tax experts and accountants to help with filing – to grow 90%, while TurboTax Live customers who are new to Intuit are expected to more than double.
The pandemic has shifted the timeline of Intuit's revenue and income. The government changed the deadline to file taxes in each of the past two years. So Intuit's business has been uneven as it deals with these delays. But as things return to normal, Intuit's business will show its strength once again.
Intuit's brands dominate the at-home tax-filing industry. These products and their durable franchises are great for Intuit's business. By building a "sticky" customer base, Intuit keeps existing customers returning year after year to file their taxes. This is a long-term tailwind for the company.
Sometimes investing is simple.