A first look at Intuit
My Stansberry's Investment Advisory team and I continue to look at the beaten-down software sector, which has been pummeled by the "SaaSpocalypse."
In my April 28 e-mail, I wrote about Software as a Service ("SaaS") company ServiceNow (NOW), which my team and I did a deep dive on in March. (Only Investment Advisory subscribers can access the issue. If you're not already subscribed, you can do so here.)
As I said in my e-mail, the SaaSpocalypse refers to "investor panic around SaaS companies, driven by fears that artificial intelligence ("AI") will severely impact their businesses." My team and I think this sell-off is overdone, which has created great investment opportunities.
In our March issue, we highlighted why we don't think companies are likely to rip out mission-critical software in favor of AI:
Major companies choose big software vendors with established reputations because they can trust them. They want someone they can rely on.
No less important, they want someone to blame when things go wrong. In the business world, folks call this "one throat to choke."
If you're an executive who cheaps out by developing software internally or switching to an unknown startup, you'll shoulder the blame if things go wrong. You'd rather deal with a big company with deep pockets... round-the-clock customer service... proven data security... and the staying power to still be in business in five years.
And in my e-mail, I summed up our thesis for software companies:
We think AI will prove to actually be a good thing for many software companies, as it expands markets and creates new ways to profit...
That doesn't mean every software company will survive this rapid AI transition. It will be painful for some. But still others will do better than ever. The problem is, the market hasn't figured out which is which.
Since my April e-mail, ServiceNow soared 20% to close yesterday at $108.73. And it jumped as much as 14% this morning on top of that.
Today, I'd like to do my usual "first look" analysis at another blue chip in the SaaS sector – Intuit (INTU). The company specializes in financial software, with well-known services like TurboTax, Quicken, and QuickBooks.
As you can see in the 20-year chart below, Intuit was one of the greatest growth stocks of all time. It rose 27 times to its peak above $800 less than a year ago.
But since then, it has been all downhill, crashing by more than 60%:
Surely the company's financials must have fallen apart to explain such a big decline, right?
Wrong!
Intuit has high gross and net margins, which have actually been rising slightly in recent years:
Its income statement over the past 20 years is a thing of beauty:
Its cash-flow statement is similarly pristine. The company has almost no capital expenditures ("capex") and produces massive, growing amounts of free cash flow ("FCF"):
Not surprisingly, Intuit has a strong balance sheet with almost no net debt:
It has allocated its prodigious FCF to a small dividend (currently yielding 1.5%), rapidly rising share repurchases, and a number of acquisitions for a combination of stock and cash:
Its most notable acquisitions were Credit Karma for $8.1 billion and Mailchimp for $12 billion. The cash portions of these purchases were posted on the 2021 and 2022 financial statements, respectively.
Despite the rising share repurchases, Intuit's share count also rose in 2021 and 2022 due to the stock component of the two large acquisitions. But it has been steady since then:
Overall, I've rarely seen such strong financials – high margins, rapid and steady growth, and massive FCF.
Turning to valuation...
At yesterday's closing price of $313, Intuit is trading at 13.2 times this year's consensus analysts' earnings estimate of $23.79 per share, and 11.5 times next year's estimate of $27.29.
As you can see in this chart, the stock's forward price-to-earnings (P/E) multiple is close to its all-time low today:
Just based on its historical financials and current valuation, Intuit looks like a huge opportunity.
But this data alone doesn't fully answer if Intuit will be one of the SaaSpocalypse winners. It's the company's future financial performance that will determine how the stock does...
Will AI make its products obsolete? Will consumers use AI to do their taxes and balance their checkbooks for free? Will businesses use AI to do their bookkeeping?
Next week, I'll explore these questions and look at the bull and bear cases for the stock. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Greetings from Paris! I flew in this morning from Milan, on my way to Nairobi, Kenya tonight to visit my parents. I'm a huge tennis fan, so I scheduled a 12-hour layover to watch the French Open at Roland Garros. Because of my support for their country, I'm the guest of the two top Ukrainian players, Elina Svitolina and Marta Kostyuk. Here's a picture:
