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Intuit (INTU) Stock | NASDAQ: INTU

Covered by Stratosphere

The Financial Ecosystem

Intuit Inc. ("Intuit") is a provider of financial management, tax, and compliance products and services. Intuit's products and platforms are widely known by individuals and businesses alike. TurboTax (software for personal & self-employed taxes), QuickBooks (invoicing, payroll, expense tracking, payments, and accounting software for freelancers, business, and accountants), Mint (financial management app), and Credit Karma are commonly used products by individual consumers and small businesses looking to manage finances, run their businesses, file and pay taxes, and stay on top of their credit score.

Today, Intuit is used by approximately 100 million customers. Intuit's highest cash-generating products - QuickBooks and TurboTax - enjoy enormous market share while its less-monetized products - Mint and Credit Karma - draw in millions of users into the Intuit Ecosystem.

Stratosphere Score

8

Growth

5

Valuation

4

Quality

8

Margins

9

Dividend

6

Balance Sheet

7
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Inuit's flagship product, QuickBooks, enjoys massive market share in the United States due to its embeddedness in the small business and accounting communities. The easy-to-use platform was marketed as such and picked up as the gold standard of the industry. Today, many new students, business owners, and advisors refer to QuickBooks for accounting and financial management needs.

  2. Intuit differentiates its products by integrating predictive artificial intelligence ("AI") and high-quality customer support into its platforms. With these easy-to-access features, Intuit captures millions of customers seeking do-it-yourself ("DIY") solutions to manage their money without the need for deep accounting or financial management experience.

  3. Intuit is pulling on three major growth levers that should help the company continue growing at high rates over the next 5-10 years. Expanding the core market by penetrating mid-market SMBs (small- and medium-sized businesses) with the QBO Advanced offering, building on the integration of the products within the Intuit ecosystem, and expanding abroad should drive sales and market share upwards.

  4. Intuit faces three major risks - cyclicality down-market in the SMB space, regulatory concerns (especially in new markets), and acquisition & integration risk. However, we believe Intuit has navigated and managed these risks well in recent history. The acquisitions of Mailchimp and Credit Karma have been a major success so far, and Intuit is seeing large growth in emerging markets, most notably in Brazil. The company is also targeting up-market SMBs, which should address the cyclicality concern (as down-market SMBs may be more vulnerable in times of economic weakness)

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Ecosystem Embeddedness

We view Intuit is a collection financial technology platform that is, in all respects, a mission-critical ecosystem for individuals and small businesses who manage credit, finances, and taxes. Managing money in one form or another is simply a reality of life - no one can escape it.

Intuit's products can be split into two categories: discretionary and non-discretionary. We place TurboTax and QuickBooks - Intuit's "money-makers" - in the non-discretionary category. These products are non-discretionary because there are few alternatives, and many of the alternatives are poor.

Oftentimes, the "alternative" choices still use Intuit's products. For example, businesses may hire a CPA to document financial information and file taxes for them. Similarly, individuals may hire a CPA to do the same. In both cases, these accountants will either recommend or use Intuit's products themselves to get the job done.

We call this ecosystem embeddedness, and this is something Intuit has done a spectacular job of capturing. Most accountants today are trained on QuickBooks. The reasons for its popularity among the accounting community are the same reasons shared by individuals and small businesses that use Intuit's services without the help of a professional: the products are easy-to-use, broad, and well-integrated with similar services offered by Intuit. This creates a near-impenetrable network effect that reinforces itself - accountants are increasingly trained on QuickBooks because freelancers and business owners use QuickBooks. In turn, accountants are highly likely to recommend and set up QuickBooks for businesses seeking a platform to host all of their financial data.

TurboTax also has few alternatives that work as well as it does. While it is not as powerful as tax software platforms used by CPAs, it gets the job done for the DIY crowd. However, the DIY crowd may find it daunting to file taxes on their own, even though TurboTax has a highly user-friendly interface.

This problem is solved with expert help from Intuit. TurboTax offers three DIY tiers (Free, Deluxe, and Premier) and another three DIY with expert help tiers (Basic, Deluxe, and Premier). The latter tiers range in price from $40 per return to $80 per return, well below what would be charged by a tax firm for similar services.

As such, Intuit created its own ecosystem powered by its own CPA and tax experts. While the ecosystem effect here looks slightly different than it does for QuickBooks, it draws DIY tax filers to consider an online option over which they have more control - there is an accountant ready on the line at any time.

With that, Intuit has captured all parts of the ecosystem with its product portfolio. Individuals, businesses, accountants, and managers are all aligned to use Intuit over competing products that are not as easy to use, unfamiliar to the broader community, and lack high-quality features and integration.

Today, TurboTax and QuickBooks both enjoy market share of over 70% in the US.

Superior Integration

The advantage of Intuit's deeply entrenched financial management ecosystem, particularly when looking at QuickBooks, is the number and quality of integrations it has with third parties.

QuickBooks integrates with over 650 popular business apps, like Amazon Business, PayPal, industry-specific CRM software, financial trackers, Shopify, Stripe, and plenty others. Freelancers and business owners can quickly set up these third-party integrations, oftentimes faster than on other platforms.

This brings forth high switching costs. Because most accountants and business owners are trained on QuickBooks, they become accustomed to the easy-to-use interface and seamless integrations with hundreds of apps. As the business expands its integrations and uses the platform for longer, the switching costs grow consistently higher. Therefore, it is unlikely a customer of QuickBooks will switch after using the platform for a long time and after setting up many integrations with third parties.

Data-Driven Tools

Intuit is best known for the integration of AI in its ecosystem to help individuals and businesses manage money. This is also the source of much of Intuit's pricing power, in our view.

Business managers and entrepreneurs are usually busy managing their businesses as opposed to worrying about their finances. With AI, Intuit can help these managers stay on top of their finances and manage money effectively without it overly burdening their working days.

For example:

  • Repetitive tasks like recurring invoices, payroll, task management (i.e., folder set-up, reminders, to-do lists), and metric reporting can all be automated within QuickBooks.

  • Transactions can be categorized and automatically identified by a certain category to make tracking and reporting easier.

  • QuickBooks can also automatically calculate total sales tax for each sale based on a customer's sales tax status, where the product is sold and where it's shipped to, and the sales tax category of the product. This makes sales tax tracking and remittances multitudes simpler for the business owner.

  • Customers using TurboTax also leverage the AI inherent in the system to determine whether a standard or itemized (i.e., basic or custom) return suits the customer best. There are several questions that a customer needs to answer after which the algorithm makes an accurate decision on the best method (and if that's too complicated, there are, of course, experts just a call away on Intuit).

  • Cash flow is usually a major issue for small businesses, especially ones that carry low profit margins. Intuit has tools that can help predict cash flows through predictive intelligence, time series modelling, and transfer learning and deep learning.

These automations increase the switching costs to existing customers and also greatly increase the value proposition of the platform. Overall, Intuit's platforms, particularly QuickBooks, are immensely powerful for the low price point and low wallet share of the customers they serve. The alternatives to these automations and software would be manual tracking, which would require to hire professionals for thousands of dollars more.

Of course, there are other products on the market, but they are lesser known, fewer professionals operate on them, they do not have the AI and automation power nor the integration capabilities of Intuit's platforms, and they do not have the benefit of being able to extract high-quality data from millions of customers.

There is a network effect stemming from the data as well. Not only does Intuit have access to customer data across four major financial management platforms to identify cash-generating opportunities for itself, it can also use this data to help existing customers.

For example, the cash flow AI predictor uses a combination of the customer's historical data (with consent) and a variety of data from similar businesses on the Intuit platform to help predict cash flows as accurately as possible.

The "little guys" get the advantages of Big Data by simply being a part of the Intuit ecosystem. Over time, this has translated to strong pricing power at Intuit.

Opportunities Ahead

  • The foundation of the business still has juice. Intuit seeks to tap into the mid-market small business base (i.e., 10-100 employees) of about 1.7 million in the US. These customers require a more advanced platform, which QuickBooks seeks to provide with QBO Advanced. QBO Advanced is a pricier product, which would help the company increase average revenue per customer and expand margins. So far, there are over 100,000 customers using QBO Advanced, and the customer base is growing at high double-digit rates. If Intuit succeeds here, the company can establish itself down- and mid-market, and potentially set itself up for success up-market.

  • With its data advantage and ecosystem of related products, Intuit has the opportunity to boost the direct and seamless integration between products. We are seeing some early signs of such developments. For example, Intuit's Mint platform keeps track of an individual's spending, which helps come tax time. The Mint platform keeps track of tax-deductible transactions that could be the reference points for a DIY tax filing done via TurboTax. Then, if a tax filer will be receiving a refund, there is a seamless integration between TurboTax and Mint that allows the user to be notified when the refund arrives via Mint. In this integration, users may be drawn initially to the Mint or TurboTax standalone services and may later find themselves using naturally using the other. Similarly, Credit Karma customers can now file their taxes using TurboTax via the Credit Karma app. Those who choose to do so can also get their refunds quicker by depositing straight into the Credit Karma Money Spend account. Integrations like these will help Intuit increase the switching costs of customers and increase leads and cross-selling opportunities for other products in its ecosystem by driving engagement.

  • Intuit is mostly present in the US with significant opportunities abroad. Most recently, the company identified a serviceable small- and medium-sized business base of over 10 million across Canada, the UK, and Australia. QuickBooks Online should be able to penetrate those markets in a similar fashion to the US due to the data advantages, brand awareness, and automation capabilities. Intuit also sees opportunities in emerging markets. In Brazil, uptake of QuickBooks has been strong with the base growing high double digits. Intuit has also seen a 13x increase in the number of markets where Intuit products would be compliant in emerging markets.

Risks

Cyclicality Hurting New Business

While Intuit is a high-quality business with recurring revenues and many returning customers year after year, new business is prone to weakness during weak economic episodes.

While individuals will still likely pay for TurboTax as taxes will need to be filed regardless of economic conditions, the lack of new businesses coming to market or businesses closing could hurt the volume of net new QuickBooks customers. There is also a risk, albeit less severe, of customers downgrading their QuickBooks packages during times of stress.

Because Intuit is mainly focused on small businesses, generally those smaller than mid-market, Intuit is exposed to seeing average revenue per customer and customer counts drop during economic weakness.

General Risks

Overall, we see Intuit executing its strategy well on all fronts - foundationally, through product integration, and geographically. As such, we do not see any imminent threats at this time. However, risks could arise in the following areas:

  • Regulations around the globe change frequently and across many domains. Intuit must remain on top of compliance in order to continue expanding globally.

  • Recent acquisitions of Mailchimp and Credit Karma have been highly complementary to the ecosystem and part of the overall value proposition. However, execution is an ongoing story, not a single point in time. Intuit must continue executing and continue to engage in highly complementary acquisitions (if it chooses to do an acquisition) in a fashion that would not dilute the current brand. While its broad portfolio is appealing, there is a certain degree of specificity required to uphold the value proposition in financial management of individuals and businesses.

  • While Intuit's products have high switching costs, so do many other software services around the world. In markets outside North America, it may be possible that the addressable market is much smaller than anticipated due to strong incumbents present that users are not willing to switch from.

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