Intuit: Double-Digit Growth Again in Q4 FY23, But 36x P/E

Company Update (INTU US) (Buy)

Highlights

• Intuit has risen 25% since our May update, and has a 36x P/E

• Double-digit growth continues in FY23 results and FY24 outlook

• Q4 revenues grew 12.3%, driven by the Small Business segment

• At $519.05, we see 21% upside (7.7% p.a.) by July 2026

• We reiterate our Buy rating because Intuit is a unique asset

Introduction

Intuit reported Q4 FY23 (ending July 31) results after markets closed on Thursday (August 24). Shares fell in after-hours trading but rose on Friday, finishing the day up 4.1%.

Intuit shares have now gained 97% (including dividends) since we originally initiated our Buy rating in September 2019, with the share price rising another 25% since we last reiterated our Buy rating in May. However, Intuit’s share price is still more than 25% lower than its peak in November 2021:

Intuit Share Price (Last 5 Years)

Source: Google Finance (26-Aug-23).

Q4 FY23 results showed that Intuit is continuing to grow both revenues and earnings at double-digits, but valuation is again becoming a concern. Total revenues grew by more than 12% in both Q4 and FY23, driven by 20%+ growth in the Small Business & Self-Employed (“SBSE”) segment; however, revenue grew less than long-term expectations in Consumer and fell in Credit Karma. Non-GAAP EPS grew 21.5% in FY23. FY24 guidance showed similar dynamics, with growth strong in SBSE, and weaker in Consumer and Credit Karma. Macro headwinds are to blame, including a post-COVID decline in tax filings and lower lending activity; there is also pressure on SMBs in some sectors. Overall FY24 growth is expected to be 11-12% in revenues and 12-14% in Non-GAAP EPS. Execution in Mailchimp and in the international part of SBSE appears to be improving. Management reiterated their long-term expectations.

At $519.05, Intuit shares are at 36.0x FY23 Non-GAAP EPS (61.6x GAAP EPS). The normalized Free Cash Flow Yield is 1.3%. The dividend has been raised 15% and now represents a 0.7% Dividend Yield. Our forecasts, which assume a 30x P/E, imply a total return of 21% (7.7% annualized) by July 2026. This is below our target, but Intuit is unique in its earnings resilience and growth potential. We reiterate our Buy rating, but see more attractive opportunities elsewhere.

(For a recap of our Intuit investment case, see our first Substack article on the company on May 25.)

Intuit Q4 FY23 Results Headlines

In Q4 FY23, total revenues grew by 12.3% year-on-year, driven by SBSE revenues growing 20.5%:

Intuit P&L (Q4 FY23 vs. Prior Year)

Source: Intuit results materials (Q4 FY23).

Credit Karma revenues fell 10.7% year-on-year but grew 3.4% quarter-on-quarter, continuing the sequential rebound that began after Q2 FY23:  

Credit Karma Revenues By Quarter (Since Q3 FY21)

Source: Intuit company filings.

Credit Kama’s revenue decline in Q4 FY23 “was driven primarily by macroeconomic headwinds in personal loans, auto insurance, home loans, and auto loans”, where lending activity fell with higher interest rates, “partially offset by growth in credit cards and Credit Karma money”. Customer engagement and cross-sell into TurboTax have both increased significantly, and Intuit has now redesigned the entire Credit Karma app.

Q4 figures for the other segments are not meaningful because Consumer is seasonal and ProTax is small.

Intuit FY23 Results Headlines

For full-year FY23, total revenues grew by 12.9% year-on-year, and Non-GAAP EBIT grew by 22.2%:

Intuit P&L (FY23 vs. Prior Year)

Source: Intuit results materials (Q4 FY23).

SBSE revenues grew by 24.4% as reported, or 20% excluding the benefit from two extra quarters of Mailchimp revenues in FY23 (its acquisition was completed at the start of Q2 FY22). Online Ecosystem revenues grew 30% in FY23 (which included two more quarters of Mailchimp), and by 21% in Q4 (which included Mailchimp in the prior-year period). International Online Ecosystem revenues grew 12% in Q4, unchanged from Q3 and still below historic trends.

Consumer revenues grew by 5.6%, below management’s long-term expectations of 8-12%. As discussed in our review of Q3 FY23 results, which included the annual tax season, this was the result of a post-COVID decline in tax filings, with some people who started filing because of pandemic-related stimulus payments and tax credits now having stopped.

Credit Karma revenues fell 9.5% for the full-year, due to the macro headwinds described above.

EBIT rose 22.2% on both Non-GAAP and GAAP bases, as margins expanded again after having fallen in FY22.

Non-GAAP Net Income grew 21.2% in FY23 and, with the average share count falling 0.4% in FY23 after buybacks, Non-GAAP EPS grew 21.5% year-on-year.

Intuit FY24 Guidance

FY24 guidance showed similar dynamics, with growth strong in SBSE and weaker in Consumer and Credit Karma:

Intuit FY24 Guidance

Source: Intuit results materials (Q4 FY23).

FY24 guided revenue growth was in line with long-term expectations in SBSE (16-17% guided in FY24, vs. 15-20% expected long-term), but below long-term expectations in Consumer (7-8% guided, vs. 8-12% long-term) and Credit Karma (-3% to +3% guided, vs. 20-25% long-term).

Management described the FY24 Consumer guidance as intended to be “prudent” in face of post-COVID macro headwinds, as CEO Sasan Goodarzi explained on the call:

“What we mean by prudent is really a couple of things. One, we're not assuming IRS growth in our numbers this year, and we're not banking on all of the innovation that I just shared paying off this coming year.”

The FY24 Credit Karma guidance was similarly described as part of this prudence. In any case, Credit Karma is the newest segment and does not have the same model of mostly recurring subscription revenues as other Intuit businesses (Credit Karma generated “nearly 60%” of its revenues from credit cards and “nearly 30%” from personal loans in FY23), so its revenue growth will by nature be more volatile and more macro-driven.

Management reiterated their long-term revenue growth expectations for each of the 3 key segments during the call.

Non-GAAP EBIT and Non-GAAP EPS are both expected to grow by 12-14% in FY24, faster than revenues.

Other Macro Headwinds

There are also other macro headwinds in the U.S. economy. Intuit has observed pressure on SMBs in some sectors, as CEO Sasan Goodarzi described on the call:

“Small Business …continue to be healthy, but they're challenged in this environment. Cash reserves of small businesses is 90% of what it was this time last year. However, it is still stronger than pre-pandemic … There are certain sectors that are very weak; transportation, real estate, advertising, is very weak within small businesses.”

Similarly, Consumer borrowing has risen significantly, but in the context of a still strong job market (and, we believe, part of a post-COVID rebound):

“If you look back to last March of 2022, credit scores are, on average, down 13 points. Credit balances are up about 30%. And the credit band of like 600-660 have the largest balances. They're carrying about $10,000 on average. And the Gen Z balances have gone up the most, are up 45% year-over-year. So job market is still good. People still have jobs, but there's certainly some level of strain on the consumer.”

These comments align with observations made by U.S. banks such as JPMorgan and Bank of America in their Q2 CY23 results, which were of a resilient U.S. consumer and still low credit losses. PayPal reported higher-than-expected credit losses on their SMB business loans, but they attributed these to their decision to widen their lending appetite last year.

However, we expect Intuit growth to remain resilient even in the event of a downturn, due to the mission-critical nature of its products and its recurring and its mostly subscription-based revenue model.

Mailchimp and International SBSE Improving

Execution in Mailchimp and in the international part of SBSE appears to be improving.

Growth rates have stabilized. Mailchimp seems to have maintained the same year-on-year revenue growth as in Q3, at about “mid-teens” (it was described as “accelerated several points from low-teens growth last quarter” in Q3). SBSE Online Services revenues, which include Mailchimp, grew 20% year-on-year in Q4, similar to Q3’s 21%. Simliarly, Online International Ecosystem revenues (which include Mailchimp) grew 12% year-on-year in Q4, same as in Q3:

Intuit International Online Revenue Growth (ex-Currency) (Since FY21)

NB. Q2 FY22 to Q1 FY23 figures exclude Mailchimp acquisition (completed 01-Nov-21). Source: Intuit company filings.

Operational improvements are continuing. Part of the reason for International’s deceleration from historic growth is that Intuit has “rightsized” the pricing of Mailchimp products in some geographies, pricing for GDP per capita, competition levels, and other local factors, instead of simply charging the same USD price converted into local currencies. Management has also improved the Mailchimp product, stating it has had the largest release in June in Mailchimp’s history and having recently translated it into 5 different local languages.

Improvements in Mailchimp and in International are now tied together, as Intuit’s “refreshed” international strategy is now based on “leading with both QuickBooks Online and Mailchimp in our established markets and leading with Mailchimp in all other markets”, and CEO Sasan Goodarzi even stated that “Mailchimp is the lead horse internationally”.

Intuit Valuation: 36x P/E

At $519.05, relative to FY23, Intuit shares have P/E of 36.0x on Non-GAAP EPS and 61.6x on GAAP EPS:

Intuit Earnings, Cashflows & Valuation (FY20-23)

Source: Intuit company filings.

Relative to the mid-point of FY24 guidance, Intuit’s P/E is 31.8x on Non-GAAP EPS and 54.5x on GAAP EPS.

Relative to FY23, Intuit’s FCF Yield is 1.3%. (We have deducted $700m for cash tax payments that were deferred to Q1 FY24 by IRS disaster-area tax relief.) Intuit’s cash conversion (FCF / Non-GAAP Net Income, with FCF adjusted for non-cash Share-Based Compensation, or “SBC”) has deteriorated significant in recent years, with SBC and related costs rising $426m in FY23 compared a Non-GAAP Net Income rising $715m.

Intuit has raised its dividend by 15% to $0.90 / quarter ($3.60 annualized), which represents a 0.7% Dividend Yield.

Share repurchases are continuing, with FY23 buybacks totalling $2.0bn (including $465m in Q4), equivalent to 1.4% of the current market capitalization (and some of the buybacks were carried out when the share price was lower). However, the average share count has only fallen 0.4% in FY23 (and actually rose 0.4% year-on-year as of Q4 FY23).

Intuit’s P/E is now higher than our long-term assumption (of 30.0x Non-GAAP EPS), implying a P/E de-rating that would offset most of the EPS growth in the next few years. We also note that Intuit shares had reached unsustainable valuations in the past, notably in November 2021 when it reached nearly $700 (or 71.5x FY21 Non-GAAP EPS), which means shares can correct significantly – though equally this can mean they can run up further, at least for a time.

Intuit Stock Forecasts

FY23 Non-GAAP EPS was 1% higher than our forecast ($14.23), and the mid-point of the FY24 Non-GAAP EPS guidance is 3% higher than our forecast ($15.81). We update our figures but keep other assumptions unchanged:

• FY24 EPS of $16.32 (was $15.81)

• In FY25 and FY26, Net Income growth of 12.5% (unchanged)

• Share count reduction of 1.0% each year (unchanged)

• FY24 dividend of $3.60 (was $3.64)

• For FY25 and FY26, dividend on a Payout Ratio of 22% (was 23%)

• P/E of 30x at July 2026 (unchanged)

Our new FY26 Non-GAAP EPS forecast is $21.07, 3% higher than before ($20.41):

Illustrative Intuit Return Forecasts

Source: Librarian Capital estimates.

With shares at $519.05, we expect an exit price of $632 and a total return of 21% (7.7% annualized) by July 2026.

This is below our target of a 10% annualized return, but Intuit is unique in its earnings resilience and growth potential. We therefore make an exception to accept the lower forecasted return, and reiterate our Buy rating. However, we also see more attractive opportunities elsewhere.

Ends

Stocks mentioned: INTU 0.00%↑ JPM BAC PYPL. We are long INTU, BAC and PYPL.

Disclaimer: This article consists of personal opinions, based on information believed to be correct at the time of writing, but not guaranteed. We undertake no responsibility in updating content in this article. Nothing published here should be taken as financial advice.