The Intrinsic Value Podcast 对 $INTU 的判断变化

You've got a company with dominant market share, growing revenues at double-digit rates, boasting operating margins north of 25%, and throwing off more than $5 billion of free cash flow. Plus, it's paying a growing dividend.

So, would you be surprised to hear that this same stock is the single worst performer in the entire S&P 500 this year, down nearly 23 from its high? That company is into it. And unless this business is set to completely implode over the next few years, getting shares at a 10-year low in its price to earnings ratio seems like a real steal.

Despite the fact that so many small to medium businesses run on into it and many Americans go-to solution for tax filing, the stock has dumped from over $800 per share to well below $300.

Today we're covering a company that I suspect most North American listeners have probably interacted with whether they realize it or not and that company is into it. Ticker INTU. This is the company behind businesses like Turboax, QuickBooks, Credit Karma, and Mailchimp.

And the reason that I think this episode is going to be a fun one is that it sits right at the intersection of two themes that we just seem to keep circling back to this year. The first is highquality SAS compounders, dominant mission critical software and data businesses like an Adobe or a co-star. And then the second theme is just the great AI disruption debate which is the single biggest question that seems to be hanging over technology investing right now which is which incumbents are going to be supercharged by AI and which ones will have their business models completely hollowed out by it.

Into it, though, is maybe the purest illustration of this debate that I've seen so far, because the market has very loudly voted that it's a loser. It's a business that compounded its stock at nearly 24% a year for a decade from 2015 through 2025, but has now sold off 60% and is actually the worst performer in the S&P 500 this year.

I want to start with just how unusual it is to be having this conversation at all because, as you alluded to, for decades, in two, it was the definition of an incredible business where the market recognized that quality. And you could very rarely get that at any kind of discount.

for that 2015 to 2025 period you mentioned and to its median price toearnings ratio was almost 50x and just to say that again 50 times earnings that is a premium of more than twice the S&P 500's typical PE ratio for context

but if you look at what has happened this year the stock price and correspondingly the PE ratio have absolutely fallen off a cliff we're talking about going from 60 times earnings to 16 times earnings.

And so in layman's terms, what that means is the market has gone from seeing into it as being a business that could sustain exceptional growth and profitability for a long time to now being seen as a business at risk of probably not just accelerating growth rates, but potentially even declining earnings in the coming years.

Yeah. And like Adobe Inuit has been widely discussed battleground stock and the setup again is quite similar. Despite the massive revaluations of these businesses and their earnings multiples, the underlying businesses have kept just chugging along growing at double digit rates. While management also continues to project these strong growth numbers into the future.

So there's a major disconnect here between the market's current assessment of into its prospects with the company's track record and management's own outlook. Businesses like Salesforce, Adobe, and Intuitit may be offering generational buying opportunities, depending on who you ask. Or they could also be the ultimate value trap, sucking investors in based on their past success. Well, AI fundamentally changes their core business models.

While with Intuit the concern I would say is probably more around Turboax where Intuitit has monetized regulatory complexity to their advantage and that drives a huge chunk of Inuit's overall profitability.

Turboax is potentially as much as 2/3 of the company's operating income depending on how you allocate overhead costs and there are a lot of overhead costs to allocate but we can talk about that more later.

They've made billions of dollars from helping people navigate their tax returns while also somewhat controversially lobbying against free government filing alternatives. And the concern now is that facilitating DIY tax returns or even tax returns that are more complicated and are assisted by professional accountants. That is a business with a limited lifespan. and there's a shelf life on it because AI tools just are making it easier and easier to tackle complexity at a minimal cost.

So the counterargument being that taxes are incredibly high stakes. Not only is your refund money on the line, but you know if you mess up there's the risk that you could be audited. So I think bulls would say that Turboax has built up a really trusted brand. And even if AI makes it easier to file taxes, many people will still want to do that within an ecosystem exactly like Turboax versus doing it directly in some sort of LLM like Claude where you just don't have the same certainty that everything is going to be done correctly.

Now, because Turboax specializes in tax software and can customize its own AI tools for this, rather than trying to use a general purpose LLM for taxes or some upstart service powered by AI that doesn't have the same brand recognition, the idea is that most customers will still end up coming back to Turboax for many, many years to come.

Or at least I think that's where your thesis, Jean, is based on what we chatted about before we started recording.

And in all three of those businesses, she was using an Inuit product among many others in her day-to-day work. So, I know firsthand that Inuit is a vital product for both bookkeepers and accountants. And speaking to a couple of other accountants, they both use Intuit products as well. And they didn't seem to be in any hurry to use an LLM to replace what they service that they get from uh into it.

And I think there's something similar to be said with Inuit. But when I see the market narrative about Turboax's DIY funnel for tax filings just exploding, clearly I'm skeptical of that. And for sure with really straightforward tax filings there is a real risk that those people stop coming to Turboax but these are not the customers that Intuitit makes money on anyways. All the money in tax comes from providing a mix of paid AI tools and human expertise virtually in what they call assisted tax filings. So these are people paying hundreds of dollars or sometimes more for help through Turboax. And again, I just don't see that being disrupted as easily from my own experience because of the high stakes and the amount of trust involved and the fact that there is a necessity for a human component, at least in a lot of people's minds.

So, it's easiest to keep coming back there each year rather than starting from scratch with a different tax software or or with a different account. And even though I don't personally use Turboax's assisted product, I would be open to it. And I do still actually end up paying into it one way or the other.

And what I mean by that is, and this is a common thing, my accountant runs all of his tax filings through into it. And so he asks his clients to sign up for QuickBooks. So, we can get more into the QuickBooks conversation, but I do my personal bookkeeping in QuickBooks and I pay a subscription fee to use the service and I got a discount on that subscription from a referral code from my accountant. And my accountant from his perspective, it's nice to have all of your clients financial data logged in the same software system. That keeps all of their work much more streamlined. And there is also an incentive to encourage your clients to use QuickBooks because accountants get kickbacks on those referrals too. So it simplifies your workflow and Intuitit knows that they need to give you a little bit of a financial motivation to start pushing your customers over to QuickBooks.

So my accountant was pretty uh keen on getting me set up on QuickBooks and I've very much seen the value of it. So what we're actually talking about really is something of a network effect amongst accountants and their clients in using QuickBooks, which is a great potential moat source for the company.

But, you know, long story short, even if you don't file your taxes personally through Turboax, the broader into it ecosystem is still profiting specifically off of Sean's accounting and taxes.

And we also haven't talked about Credit Karma, which for anyone not familiar is this all-in-one personal finance platform, and it's a great place to find credit card recommendations based on your financial situation, compare car insurance policies. I've used it for that. You can check your credit score and actually get tips on improving it. Shop mortgages, compare interest rates on bank accounts, explore personal loan options, track your net worth, and there's like a dozen of other things that I'm probably not thinking of in that vein that you can do.

And the thing is, if you sign up for a credit card or a car insurance policy there through Credit Karma's website, they get paid for those clicks and signups by the companies using those products. So, they get their own kickbacks from that, directing that traffic. So, Credit Karma is not taking on any financial risk and making any loans on its own, but they are getting compensated for just being this really simple but effective platform for navigating the vast majority of people's personal finance needs and making recommendations.

And I think you could say that that is an area that's more clearly under pressure from LLMs, right? You might open chat GBT and say, "Hey, what is the best credit card?" But there is still something to be said for brand trust. And Credit Karma has a lot of brand trust and knowing that the recommendation you're getting from Credit Karma comes with a lot of customer reviews and vetting in a way that the response you get from an LLM is maybe more of a black box.

I don't want to say that there's a wide moat around Credit Karma's business, but it is an important part of the ecosystem and the funnel into the rest of and to its products.

So, I'm kind of imagining that Credit Karma is kind of a type of lead generator for Turboax and into it more broadly, right? someone comes in, they explore the tools to maybe support their financial situation, and then they see the option to file taxes for free through Credit Karma or maybe even get an advanced loan on their refund, and boom, they're right there inside of the Turbo Tax ecosystem.

So, Turboax is actually integrated directly into Credit Karma right now. And maybe this person takes a DIY approach this year, but maybe next year they decided that it was a bit too complicated, so they pay for assisted tax support. and then maybe they start a small business hustle on the side and now they're using QuickBooks to do the bookkeeping specifically for that. And anyways, you can just see how over time people get sucked deeper and deeper into the into it ecosystem. There's just a ton of stickiness and pretty good opportunity to cross-ell and upsell.

Now, the other thing is that Turboax's business is pretty much as seasonal as it gets. Everything kind of happens in the first half of the year, but at least with credit karma into it has more recurring and year round touch points with people's financial needs.

What that also means effectively is that Credit Karma helps lower into its customer acquisition costs, especially for Turbo Tax. And that's one reason of many why into it paid $8 billion to acquire Credit Karma in 2020.

And so it's dramatically cheaper to get an existing customer for one of your other products like Uber with ride hailing to try Uber Eats than it is to acquire a brand new customer from scratch with marketing and Intuitit knows that very well too.

Right. So I actually got a chance to speak with David Fagan who's actually a recurring guest on tip and he's also the owner of an accounting firm. So we got a chance to speak at length specifically about in it and regarding credit karma and mailchimp he thought that in it was trying to improve their service offering to their customers.

So this can kind of work out really well if you truly add value to your customers and can charge them a little bit more or it can backfire and we'll go over this a little more today but I really see your connection here with Uber. If you can acquire a business for a reasonable price that lowers your customer acquisition costs and can land you similar quality leads to just spending more money on marketing, as long as the economics make sense, I think that can make for a very, very good acquisition.

Now, I love that we're covering so much ground here pretty quickly, but I did actually want to return to that point about into it being kind of this perennial compounder and the fact that based on conventional valuation metrics, it was never a cheap stock, at least not at any time in recent memory.

Personally, it's a business that I've admired from a distance because the financials are so good. And the growth prospects have always made a lot of sense. It's just been a valuation question. It's just always been too expensive for my taste and it was just been one of those businesses where I'm like, I'm going to watch the show from the sidelines, eat some popcorn, and see what happens.

But now, given the way the price has dropped, perhaps it's an opportunity. And in the last 12 months, revenue has grown 15% year-over-year. Operating profit margins have risen by more than a full percentage point. And then correspondingly, you've seen operating profits grow at nearly 30% from this time last year. So that's more than double their revenue growth rate thanks to the business's incredible operating leverage.

And that kind of move doesn't just happen because of one bad quarter. And in into Intuit's case, there isn't necessarily even a bad quarter to point to anyways. Yet something structurally spooked the market.

So the bare narrative behind this is that if LLMs can answer any tax question you throw at them, then who needs Turboax? And if an AI agent can do your bookkeeping for you, then who needs QuickBooks? And so the whole company is software that helps you do financial tasks. And as we move into a world where we all have hyperpersonalized AI assistants, maybe with godlike computing power and digital capabilities, then they can do everything for us. And simplistically, there's just no need for any SAS business to exist.

And I'm not necessarily saying that that is the mainstream view, but there are definitely people out there that would make that argument and are trying to say that Inuit is dead and Adobe is dead and Salesforce is dead and so on.

So I know that juxaposition underpins your thoughts on the so-called SAS apocalypse but at the same time uncertainty facing businesses like Intuit has genuinely increased very significantly. So that means it should be reflected in the valuations. But there are also bigger risks to Intuit's business model today than anyone would have anticipated 5 years ago.

But you know the question I think with Intuitit and all of these SAS giants that have sold off is whether the market has just gone too far. Yes, Intuit should definitely not trade at 60 times earnings today, but should it really be just 16 times earnings? That's a 50% discount to the broader S&P 500's price to earnings ratio, which implies that most of the business in the S&P 500 are higher quality and have better growth prospects than into it. And I just don't think that's a logical leap that I'm inclined to really make at this point in time.

It's a hard pill for me to swallow when you look at a company with 80% gross margins and 30% operating profit margins or nearly so which for context is not all that far off from Alphabit's operating profit margins which is a pillar of the mag 7 and so I say that a little tongue and cheeky but not entirely and to be clear we are simplifying things of course in terms of how to think about what the right valuation multiple is but still directionally the point remains unless into its business is going to collapse in the next 5 to 10 years or there's just no terminal value despite the fact that management has actually guided for double-digit growth consistently longer term.

It's hard not to think that at a minimum intuitit would be a good mean reversion bet where the stock could just simply double by simply returning to a PE multiple in line with the broader market average.

But let me just play devil's advocate here or just play the role of someone who needs to be convinced. So, I will say that the bears don't sound completely crazy. You know, AI genuinely is a very good method for answering questions and automating repetitive digital work, which is at the heart of what into its products do. So, granted, that's kind of an oversimplification, but it's not super far off.

To me, it comes down to the market confusing the idea that AI can do a piece of a task with the notion that AI therefore destroys the entire business that owns that task and related tasks. And so I do think those are very different statements and to its moat in my opinion is a tangle of switching costs, proprietary data, distribution, trust and crucially accountability, right? being able to point to if your taxes get messed up and you get audited, you can point to it and say it's Intuit's fault. And you know that sounds bad for Intuit, but that actually is a good reason for customers to want to stick with the product.

Okay, so rewinded in 1983, there's a guy named Scott Cook. He's a former Proctor and Gamble marketing executive. And as the story goes, he's sitting there at dinner one night watching his wife work at the kitchen table. And she's frustrated. She's trying to balance the family checkbook by hand. And Cook, having come from Proctor and Gamble, has this very deep instinct for understanding consumer pain points. Right? Proctor and Gamble is sort of famous for doing an excellent job of listening to what consumers are saying and creating products that actually address their pain points and even very small ones. And so he looks at what his wife is doing and her struggles and things. Personal computers are going to become more common in homes and this is a chore that a computer should be able to do. So he teams up with a Stanford undergrad with a programming background and together they build a piece of software to manage personal finances and they call it Quicken and they name the parent company into it because the whole idea is that using it should be intuitive. It should just make sense to a regular person who is not an accountant.

And that is the whole ethos behind Turboax, Credit Karma, and QuickBooks for small to mediumsiz businesses doing bookkeeping, payroll, and a bunch of other stuff.

So, I love that the entire company started from watching one person struggle at a kitchen table. That's about, you know, as grassroots as it gets for what has now become nearly a $200 billion company at its peak valuation.

It does sound a bit woowoo, but my perception is that this thought process with a focus on things literally being as intuitive as possible and also sort of obsessing over optimizing for customer pain points like the founders's wife sitting at the kitchen table struggling with balancing the checkbook. I think that really has come to define the company's culture and cook actually made famous this practice called follow me home where intuitit would literally ask customers to be able to follow them to their homes or to their offices and just watch them use the software so they could see any real friction points as they arise in real time rather than trying to guess at what problems people might have.

And it uh it does sound a little bit creepy admittedly in hindsight, but it's metaphorical mostly. I mean, I'm sure they really have gone to people's offices and homes to observe them using Intuit software, but to me, I see it as more of a mindset. It's a commitment to not designing some beautifully engineered and wildly complex tax solution, for example, that no one knows how to use, but to instead focus on creating products people can easily navigate by closely listening to their feedback of what is confusing and what's not confusing and what's helpful and what's not helpful.

So before working with TIP, I actually used Canva kind of all the time to help make images for use on Twitter and Substack. And you know, it was super easy. was super intuitive and I didn't have to spend really any time trying to figure out how to use it. It was just that easy. But I must admit, I haven't used Canva in years. And once I could use AI to generate images, I was less and less likely to use it over time.

>> I agree with that. And that obsession with watching what customers actually do rather than what they say they do is a thread that runs through the entire company and has for 40 years now. So Cook actually has this really great line. He says, "A brand is no longer what the company tells the consumer it is. It's what consumers tell each other that it is." And yeah, I I really like that.

And just to continue on with the story here, you can imagine that by the mid 1990s with Quicken winning a lot of users over with their accounting software, this naturally caught the attention of the most powerful software company on Earth at the time, Microsoft.

Well, so in 1994, Microsoft tried to acquire into it outright for about $1.5 billion, which was an enormous price at the time, but the deal ultimately was abandoned over antitrust concerns.

And one of the expressions internally at the time which there I was some truth to I believe was that quote Microsoft can't match our depth of consumer empathy. And Microsoft did eventually give up and discontinued Microsoft money after having built a product that was more complex than it needed to be. It had fantastic engineering behind it because Microsoft had the best engineers, but it was not intuitive to the everyday user like Quick and Products were.

And so I think that really means that INT is a kind of a scrappy company and the business has only gotten more robust since this clash with Microsoft, which is something to really keep in mind for those that are prepared to write off into it entirely due to this next battle that they're supposedly going to have with AI.

I don't want to lean on it too hard because AI risks are definitely not the same as what they face with Microsoft money obviously, but I just don't see into it as some naive victim either who's never faced disruption risk before and is just sitting there on its laurels waiting to get taken down by AI.

I mean, being challenged by Microsoft, their army of engineers, and their nearly endless funding, they could theoretically pump into a business is a very, very scary thought to me. But, you know, it goes to show you that if a business really focuses on delighting its customers, it can take on opponents that it probably shouldn't be able to given the gap in resources, which is exactly what in it did back then.

So, for example, a couple of years after Quickn launched, the team was running surveys and noticed something strange in their data, and that was a meaningful chunk of Quickn users were not individuals managing a household budget. Instead, they were small business owners using a personal finance tool to run their businesses on because the B2B accounting software available at the time was too clunky or complex and built for trained accountants.

And so naturally, Intuitit then focused on building a version specifically for these business owners and that became QuickBooks and this is the crown jewel of the business still to this day.

And over the following decades, QuickBooks became really the standard in small business accounting in the United States. And that really is not an exaggeration because for context, we're talking about a market share as high as an 85 to 90% amongst small businesses.

So if you're helping people and businesses manage their money, taxes are sort of a clear vertical to move into next. They took their signature customer ccentric focus to tax prep and Turboax quickly became the dominant do-it-yourself tax filing product in the country.

And to this day, more than 40 million people file their taxes through Turboax. So as we look at the business today, Intuitit has assembled this collection of products that all sit at critical and recurring moments in a person's financial life. That's how I think about it. Or maybe a business's financial life. Your books have to be right. For example, your taxes have to be filed. You're a small business. Your employees have to get paid. These are not optional things. They're very, very high stakes.

And again, as I realized with my own taxes, you want to have very high conviction and confidence in the accuracy of your filing, which for most people means connecting with a human accountant at some point in the process or at a minimum working with a brand that is as trusted as Turboax and QuickBooks and Intuitit generally as opposed to some new upstart AI powered tool.

And so in TU it will proudly tell you on their earnings calls about how they're blending artificial intelligence with human intelligence too. So on the Turboax live platform for getting human assistance and it has more than 12,000 licensed accountants and tax attorneys that are ready to help you with really any problem you face.

So point being, Turboax offers a full spectrum of options for people's taxes really based on the complexity and amount of help that they need. So there's actually no doubt that Turboax is a great product that users love.

Whenever tax season comes along, I remember seeing all sorts of department stores with Intuitit Turboax products prominently featured in high traffic areas and this is in Canada specifically, not even the US, which he said basically a monopoly. So, you know, this is a product that is very, very wellnown. And I think if you asked a friend or a family member if they've ever heard of Turboax, there's a very, very good chance that the answer to that is going to be yes, which speaks to the monopoly like characteristics of that business segment.

Intuitit reports the business in essentially two big buckets. And so the larger bucket is called global business solutions. Very catchy name. And it's roughly 60% of total revenue. So when you hear global business solutions or GBS, just think about in it small and mediumsized business empire basically. And the heart of that is QuickBooks, but it's wrapped around an increasingly large money business as they refer to it. And so what that includes is payments, payroll, business checking accounts, lending, and bill pay services.

And so not only are these very sticky parts of QuickBooks various subscription offerings, but they're built on Intuit's underlying data advantage. And so, for example, Intuit can see your cash flow and your payroll history, and then they can underwrite a short-term loan to help your company cover payroll in a month when cash is low.

It sort of reminds me of Marcatoa Libre, which people like to think of as the Amazon of Latin America for anybody not familiar with the company. And the reason I make the comparison is because they have all these data points on consumer shopping habits and they actually use that information to issue credit cards to underbanked population. So people that wouldn't otherwise have credit scores, they use this sort of alternative data source to determine their creditworthiness. And so in my opinion, Intuit is doing something similar with their customer data, but they're using it to build a fintech arm that's more focused on B2B offerings, right? Products for small and medium businesses.

And so they now actually carry almost $2 billion in net loan exposure from the loans that they've underwritten themselves. And the last part of this segment that I should mention is also Mailchimp. and that is the email and marketing platform they acquired for $12 billion in 2021.

And then the newest piece to the global business solution segment is something known as Intuitit Enterprise Suite. So wait a minute, they went through quite an inquisitive spree during the pandemic though, didn't they? 20 billions on acquisitions in 12 months or so.

It's true. And given that the Mailchimp acquisition at least hasn't exactly been a home run, you can see why that same pace of M&A has not exactly continued. Mailchimp is okay, but there's a lot of competition in email marketing platforms and I would not say there's anything particularly unique about it that makes the business an obvious fit inside of into its ecosystem. And so really the acquisition there was a little bizarre to me honestly.

And I think it's telling that when you hear management report growth figures and make growth projections, they literally do so by giving the numbers with and without accounting for Mailchimp. And so that is absolutely not an accident. And I don't think it's an accident either that Mailchimp's performance has largely been offiscated by QuickBooks outperformance by clumping them together in the same reporting segment.

So the Mailchimp example kind of makes me think of one of Peter Lynch's principles of diversification, which I'm sure you've heard of before. You know, his idea was that when a business gets flushed with cash, instead of doing simple things like just paying a dividend or buying back shares, they decide to get a little bit fancy. And in that process, they can use the cash to buy businesses which are veiled as diversifying the business, but really just make the business worse. So in my view, Mailchimp was kind of just that.

The other bucket is obviously more on the consumer side of things with Turboax and Credit Karma. >> That's right. Yeah. They actually combined Consumer Taxes and Credit Karma, but also their professional tax group that sells software to professional accountants. So like the accountant I work with, that is also included in this reporting structure as of 2025.

But I want to get back to your comment that QuickBooks has something like 80% or more market share among small businesses cuz that's an astronomically high number. Where exactly is that growth coming from when you have that degree of penetration? You know, if you already own almost the entire market, you can't just continue adding customers on and on forever.

>> So growth in QuickBooks can come from three levers. Lever one is price. when your entire financial history and your reconciled transactions, your payroll, your tax records, if you have all of that living inside of QuickBooks, a price bump of a few dollars a month is not going to be worth the enormous pain of migrating. And so into it probably has a lot of untapped pricing power on that front still.

And lever two boils down to cross-selling, which means selling each customer more services. So moving them from just accounting to maybe add-on subscriptions like being able to process payments, payroll, and all that kind of stuff. And this is how combined with price hikes, you consistently grow average revenue per customer, which is a key metric for this company. And they may potentially be able to do so at double-digit percentages for a long time to come. That's my hope as a bull on the company.

And this again is part of what they call the money business. Even if that doesn't get carved out and reported separately, it does appear to be growing very fast. Payment volumes facilitated by Intuitit are up nearly 30% year-over-year.

So each one of those services deepens the relationship and raises the revenue per customer. And when I say payments processed by Intuit, this means the ability for a business owner to generate invoices. So imagine you're a farmer working at the local farmers market. It's not as easy as you'd think it is to get the money from one bank account to another to get paid. And by just having an Intuit subscription, they give you the ability to create invoices that allow you to process payments. And so that is a huge value ad for a lot of small businesses.

And then the third lever, which I would say is the one Wall Street is most focused on, is moving up market into reaching bigger companies. And so that's what the Intuit Enterprise suite or IEES is that I mentioned a minute ago.

The way I think about it is Intuitit is more targeting a gap in the middle of the market than they are trying to go all the way up to providing business software for the largest corporations in the world. That's just not an area where they can compete.

Then there's this enormous underserved middle market in between. And so what Intuitit noticed was that of course many medium-sized businesses were once small businesses which means that they were probably customers of Intuitit at one point and then for whatever reason they grew out of the QuickBooks software and maybe their financial needs became too complicated for what could be tracked in QuickBooks. And so many of these companies though could not justify or afford the cost of full ERP systems, Oracle Netswuite type systems, but they loved their QuickBooks subscriptions and they really were just wishing that they could get more out of them. So, the Intuit Enterprise suite really seeks to rectify that dynamic.

And the hope is that maybe they can win over some new midsize clients. But long term, if they can just simply stop losing as many subscribers as businesses mature to a more medium size, that actually can dramatically expand their earnings, assuming they continue to dominate the top of the funnel with small businesses.

And as we said earlier, it's far more cheaper to keep an existing customer than it is to acquire a new one. And so if they can keep small businesses as customers for longer as they progress into being medium-sized businesses, that is a huge boon for the overall company.

I like this. I I really like their strategy for lengthening the runway that they currently have. you know, the lifetime value of the average customer can keep growing as in it improves its ability to cater to these kind of more and more mature businesses and reduce these unwanted churn where businesses didn't necessarily want to switch, but with no other option, they basically were forced to do so.

>> Yeah. And they're already having success with it. So, Intuit Enterprise Suite in its first year drove something like 40% mid-market revenue growth and QuickBook customers who upgraded to IEES more than doubled their spending with into it.

So, historically, a business would use QuickBooks for maybe 7 to 15 years on average, but now as you said, that runway can potentially be much much longer.

I think intuitive executive suite was kind of the logical choice for intuitit to develop internally. They wanted to avoid kind of that match.com issue where successful users of their product no longer have any actual use for it. So in in it's case, you don't

This really is what's driving most of the bearish sentiment on Wall Street today as I see it. And so with DIY taxes being a roughly $5 billion addressable market, Intuitit actually only sees that as being about 12% of Turboax's total opportunity.

it's not helping sentiment that these DIY volumes on Turboax have actually been declining slightly for a few years now. if fewer and fewer people are entering the top of the funnel of the Turboax ecosystem, then the terminal value of that business is going to suffer because eventually it catches up with you when customers stop flowing through the top of the funnel and you run out of customers to monetize lower down with more complicated tax assistance.

since then Turboax's federal DIY volumes are down 9% cumulatively. So filings dropped about 5% in 2023 and then less than 2% in each of the next few years.

And yet the IRS did actually try this and it did not exactly catch on. But that is what Intuitit is really good at, better than anyone at. Plus, Turboax Live has actually been the fastest growing part of the consumer business by a mile. It's not even close. It's compounded at something like 38% a year for over 5 years now and now represents a majority of Turboax's total revenue.

The bears to me are hyperfixating on the small mature slice that's shrinking at 1% a year and then declaring victory as the stock has fallen while the company is actually taking share in a bigger market it barely used to touch.

Is any of this actually defensible in a world of increasingly capable AI? So make the case for intuitive mode. You know, why hasn't some startup or maybe even anthropic or open AI come in and tried to disrupt them?

I really don't want to underestimate the importance of switching costs when you're talking about migrating your financial books and transaction records. but still Turboax already has all of your prior year information and just autofills it and that can save you hours.

a bear would say that an AI agent could do the painful migration for you as a business and it could definitely re-enter all your tax info automatically just by reading your documents.

Half of the business's total earnings could theoretically be at risk if say the Turboax business goes the way it blockbuster over the next decade.

And I do also think that proprietary data is a big part of the QuickBooks and Turboax moat along with already having distribution in place.

in it knows what actually happened on tens of millions of real tax returns and on the small business ledgers of millions of companies. And so the way this broadly works is that they do actually have banking partners that make the loans for them technically since Intuit is not a bank, but Intuit agrees to then immediately repurchase all or a percentage of those loans from their partner banks. And so we're talking about purchasing billions of dollars in business loans.

even if a better bookkeeping tool comes along to the market, maybe an AI based one, question is are you really going to switch to it if you rely on intuitit for getting financing to pay your bills? And my answer to that would be probably not.

Intuit has been building what they call Gen OS and essentially that's their own generative AI operating system and on top of they're rolling out AI agents.

their accounting AI agents are actually already doing work at scale. that's the vision for how Intuit is going to continue to create value and potentially drive excess returns in this post AI world because they have the distribution and the data to do the best job building the agents that are going to revolutionize these workflows.

you need proprietary data for data accuracy. We've talked about that already. You need distribution to tens of millions of customers that you can deploy the agents to and to it has that and so you need a trusted brand and I would subjectively argue a human backs stop so people will actually let the AI touch their money right can you imagine what it takes for you to feel comfortable allowing an AI agent to access your bank account and I don't know how easy it will be to accomplish that but if anybody has the brand and the resources and the data and the team of human expertise to sort of fill in the confidence gap that people need to feel comfortable allowing AI agents to have that kind of access. I would say that exclusively belongs to intuit

from my research, once a customer of an SMB are embedded into into its products, the chances of them leaving are very, very low. So just to kind of give an example on QuickBooks online you can actually directly link your bank account. So when you make a transaction from the bank account QuickBooks online will automatically sort the transactions out for you specifically for bookkeeping and tax purposes.

So, if management is so confident in their positioning, why do they just recently announce a 17% workforce layoff? Is AI already creating these massive efficiencies internally or is it about signaling cost discipline to Wall Street?

I think the reality is that when you're running a company that has seen its stock just get wiped out by 60%. It does feel psychologically important to employees and management to feel like there's a floor beneath your feet. And one way that you can do that is by promising to trim the workforce and to also spend $8 billion on share buybacks, which is the other piece of context here.

So what is really impressive to me is that in its revenue per employee since 2017 has risen from 633,000 633,000 per employee to an estimated $1. 2 million per employee after these cuts. So just an incredibly profitable business. And they've shown an ability to generate dramatically more revenue with less. And you could also think of this as being like operating leverage.

And supposedly the cuts are being done to weed out unnecessary middle management and to make into it a leaner and faster organization which is it's pretty standard corporate speak. I do think that if the stock had not come under such remarkable pressure, you probably don't make these moves while everything else is seemingly going well. That's my speculation.

to the extent that this is true, it would be a bit of a a modest yellow flag because you don't want management to be running the business with a focus on the short-term stock price over what's best for the business long term.

So, that's something for us to keep in mind as we continue to keep an eye on it. I wouldn't say it's a disqualifying concern in my book, but it is something to, you know, where you're reading between the lines and really want to understand why that decision was made.

Yeah. And doing the same thing, reading between the lines there, if you look at it from a positive aspect, it just means that they're hopefully going to continue making the same amount of revenue, if not more. and now their operating expenses have gone down, meaning you should even maybe even see some operating leverage, which is obviously a great thing to see and something that they've been very good at developing in their past.

With all that said, I think it's a great segue here to talk more about the people running this company and how they spend the corporate treasury because obviously a cash machine like into it lives and dies really on their ability to allocate capital profit.

The CEO is Sazam Gdarzi who has been running the company since 2019 and came up through the business. He actually ran the small business group and the consumer group before taking the top job. So I like that he knows all the products intimately. Scott Cook, the founder, is still around as chairman of the executive committee. So there is still that founder DNA that's kind of lingering around.

And then I would generally characterize management as competent, missiondriven, and clearly aggressive about pushing the company into AI tools and up market. And so their slated long-term target is to accelerate revenue growth back toward 20% a year by 2030, which is ambitious, but I love it. It's certainly completely at odds with the narrative that you're seeing from the market.

And you actually might find this interesting, Kyle. 95% of the CEO's comp is performance-based, which is, I think, a good thing, but it comes with an annual bonus split between revenue and non-GAAP operating income metrics, which are less of a good thing.

Yeah, there's parts of that comp structure that I definitely like and something that I dislike. You know, I really like that 95% composition waiting as being performance-based. Love that this means that Cassan Gdardi cannot just sit on his laurels and expect to be paid. He literally has to perform in order to earn his incentive. But the revenue and non-GAAP operating income metrics are, as you'd assume, not the ones that I think best align management with shareholders.

And then longerterm equity incentives are largely paid out based on total shareholder returns over 36 months relative to a set of beer companies. So that's good. That's a check. That's a pro. But I'm always dubious though of how the peer comp sets are defined when you have this kind of setup and whether management is being given a layup to earn their stockbased comp against some arbitrary definition of companies that are peers and aren't peers where they're being set to compete against inferior companies.

And I also wouldn't necessarily say that 36 months is what I would consider longer term, but you got to get what you can take sometimes. And all in all, it's not a non-starter comp package. It has good things about it. It has bad things about it. But again, for me, it's not necessarily something that would disqualify me from wanting to invest in the business. It probably doesn't rev up my enthusiasm, but not necessarily a disqualifying factor.

And so, one other detail here is that Inuit CEO is required to hold 10 times his base salary in stock. That sounds good. But when you remember that it's a very modest base salary to judge against since it's 95% of his comp is coming from bonuses, well then that sort of just makes it feel silly.

And what that actually means is Gdarzi only owns about $5 million worth of shares after seven years as CEO. And I find that really disappointing and really not one of the most inspiring parts of the thesis. It's not terrible, but it's not it's not inspiring.

On the other hand, management does combine to own about 2 and a half% of all shares outstanding, which is pretty good for a company of this size. And with Scott Cook as founder of the company, he still owns 1.5 billion worth of stock. So, he definitely has skin in the game as chairman of the board and is making sure that the culture of the company is not moving in the wrong direction.

Now, there's kind of a red or yellow flag here that I need to uh ask you about here, and that's that about 10% of revenue is paid in stockbased comp, if I'm reading this correctly. So, I wouldn't say that stockbased comp here is modest here at all within it. Honestly, it's kind of a bit concerning to me that we've seen SBC as a share of revenue increasing over time. That's not supposed to happen. It's actually doubled as a share of revenue since 2020.

And the result of that and also the acquisitions is that we've seen the share count compound at about 1% per year since 2020, which isn't egregious, but that's still a very real dilution cost.

And as we've seen the buyback yield spike as the stock has declined and as they've committed more and more to buybacks, I'd say this isn't entirely just a signal strength. You very much need to be buying back billions of stock just to offset the shares that you've been issuing.

But at the same time, beside previously scheduled repurchases, there's not really any indication that management is putting their own money to work buying shares if they believe that they're materially undervalued. >> That's also true. And as we bring it all together, I should mention there's a modest dividend for us to factor into our expected returns. They pay out about 20% of earnings as a dividend.

And the good thing is when you gush cash the way this business does with really high margins, you can afford to do three things simultaneously and that is adequately reinvest in your business, repurchase shares to shrink the share account and also to pay dividends. Those are sort of the three pillars of shareholder returns.

Well, that's our cue. Let's talk more about valuation. And I want to hold you to your own standard here because you're the one who's always saying that a great business is only a great investment at the right price. Now, I would say that the parts of in it kind of have me at a little bit of odds. QuickBooks is a great business. Turboax is a decent business. Credit Karma is a solid part, I think, of the entire flywheel. But then you get to Mailchimp, which most definitely is the weak link. So, the quality here is kind of mixed, but overall it's pretty good. And so, the question is, what's the price? Is it right?

Starting with a uh basic just price to earnings lens at around $270 a share, which is where we're at at the time of recording, Intuitit trades at roughly 15 to 16 times trailing earnings on a reported basis. And so to me, that's very attractive. And it's even more attractive when you look at the forward PE projections that put it at about 10 times earnings. So, as the business keeps growing, if the stock is flat, the discounted intrinsic value of course will only widen. And honestly, coming down from 60 times earnings, I do feel as though that's a pretty sufficient margin of safety. And it's not to say that into it can't go lower, but it's definitely not a half bad entry point.

Okay. But a cheap multiple on a company the market thinks is completely impaired isn't automatically a bargain. It could also be a value trap. So, what's your estimate of what the company is actually worth?

With the usual caveats about financial modeling, I I do run through three scenarios where the business sees Turboax basically flatline in a bare case. Things keep chugging along as management expects in the base case. And then in the bull case, you have a scenario where AI it really helps drive growth and further profit margin expansion because they're able to get more revenue out of each employee they have on their team. That's a great example of that. And if that trend continues, that would be a great illustration of what the bullc case looks like.

And so anyways, with a pretty crude approach to that modeling, accounting for dividends, I see into its fair value as being about $400 per share. And so stacking on an additional just arbitrary number here, but an additional 20% margin of safety suggests that shares are attractive to buy at around $320 or lower.

And just to quickly mention it, if you want to see my model, you can click down into the show notes for the episode into the description. It's going to be available to download entirely for free and you can look through my model and my assumptions. And so at current prices, the expected return from the model is 18% a year per year over the next 5 years. And that is just sort of a mathematical calculation, but I actually think a lot of those returns will be front-loaded.

And so at some point, me speculating here, maybe later this year or next, I would not be surprised if the narrative switches again and into it rallies significantly in the same way that Alphabet rallied last year when the narrative flipped with chat GBT being a competitor or not. And so again, that's my speculation.

And so it's also not uncommon to see the S&P's worst performer in one year become one of the better, if not the best performers the following year. That's a well-known pattern. So, with all that said, I am pretty excited for a variety of reasons about buying into it below $300 per share. To me, it feels like a real bargain and I would love to add it to the intrinsic value portfolio. And personally, I would probably be comfortable making it as a 5% position in the portfolio. But if you have hesitencies, Kyle, maybe we can treat it as a 2% tracker position for now. And then we should obviously get Daniel's input, too. I know he's overheard our conversations about into it and I would love to hear where he lands on it.

So yeah, what's your take, Kyle? >> Yeah, I mean I think you've definitely sold me on into it more so than what I used to think about it before kind of researching this and before hearing more about your thesis. I think in it is very clearly a high quality business. But for me, I think the question really comes down to whether the business's moat is widening or shrinking. To me, QuickBooks Online, which I think we've made really apparent here, is the crown jewel. But I do have some questions on the other three segments that I don't think they're necessarily a zero by any means, but I think I'd want to spend some more time really understanding them before wanting this to be a completely full 5% position.

So, I will say this, the business is super cheap. I'm right there with you. I think in it, similar to some of the other SAS names that we've covered, Constellation Software for instance, have just been completely unfairly punished. into it has some real switching costs and I think that's going to keep them competitive a lot longer than the market is currently valuing them for.

So I think we kind of maybe stick with this 2% track position and then add on increased conviction or if the price continues to drop. >> Okay. All right. So we'll be adding into it to our portfolio.

And as always if you want to follow along with the portfolio and see what it looks like you can sign up for our intrinsic value newsletter. Just head over to the investorspodcast.com. That's completely for free. And with that folks, let me leave everyone with a quote from Inuit's founder Scott Cook that I think captures why I'm willing to step in here and invest while a lot of other people are running for the exit. So Cook said, "Instead of focusing on the competition, focus on the customer. " And the market right now is telling itself a story that AI makes in it obsolete. But the people who actually use Intuit and QuickBooks every day are telling each other something completely different, including me as a user. And Intuitit has shown that culturally there is a maniacal focus on the customer first. Sort of like Amazon, which is famous for that. And so I think that makes it a very hard business to beat.