The impending end of tax season got me wondering if Intuit (NASDAQ: INTU); the company behind TurboTax, is a value investment?
After all 43% of Americans use a digital tax preparation solution such as TurboTax, GoBanking rates reported. Each of those people also spent around $200 on tax preparation, a report prepared by the staff of U.S. Senator Elizabeth Warren (D-Massachusetts) concluded.
The same report showed that the present U.S. tax system is rigged in favor of companies like Intuit. It noted that Intuit and tax preparation companies have successfully blocked efforts to create a “return-free” simplified tax system and were able to get what amounts to free advertising through the IRS’s Free-File program.
Intuit Might have a Lot of Float
That indicates Intuit has a very popular product which a large percentage of the population needs, and a wide mote to protect its services. More importantly the government forces Americans to use that product, and provides incentives to do so in the form of tax refunds and credits.
This certainly sounds like a value investment that might generate some float. Particularly when combined with Intuit’s monthly subscription services such as QuickBooks and QuickBooks Self Employed. Like a lot of gig economy workers I send Intuit around $18 a month for QuickBooks to keep track of my finances.
Since there are now around 55 million freelancers in the United States according to a report from UpWork and the Freelancers Union, Fast Company reported. That’s a lot of potential for float.
Does Intuit Make Money?
Intuit is in a growing market that has the potential to generate a lot of float, but does it make money? The answer provided by the January 31, 2017, earnings report data I found at ycharts is not as much as you would think.
Here are the financial results from Intuit for last quarter.
- $4.852 billion in revenues.
- A net income of $969 million
- A profit margin of 1.12%
- A free cash flow of $246 million
- Assets of $4.373 billion
- Cash and short-term investments of $637 million.
- $1.395 billion in cash from operations.
- An enterprise value of $30.67 billion on April 17, 2017.
- A market capitalization of $30.20 billion on April 17, 2017.
Intuit’s Revenues are Growing, is its’ Income?
Intuit is not making that much money from its business, but it is growing fast. Revenues have been rising dramatically, by $385 million in 2016, or a growth rate of around 10%. That indicates Intuit’s gamble on the gig economy is paying off.
Yet is Intuit making more money off those additional revenues? The answer is yes, the net income rose from $508 million in January 2016 to $969 million in January 2017 – an increase of $461 million in just a year.
Although cash from operations did fall slightly during the same period; Intuit reported $1.386 billion in cash from operations in January 2016, and $1.359 billion a year later. That and the low free cash flow and profit margin might be an indication of high operating costs that are eating up the company’s revenues.
One major cost that might be plaguing Intuit is cloud-services because most of the TurboTax and QuickBooks solutions around these days are cloud based. That means much of the float is going to cloud services providers like Amazon (NASDAQ: AMZN) rather to Intuit.
This means that Intuit might not be capable of income growth, but might be an acquisition target. A potential suitor would be Oracle (NYSE: ORCL) which is flush with cash right now. Oracle reported cash and short-term investments of $59.35 billion on February 2017, so Larry Ellison would be able to gobble up Intuit and still have around $39 billion in the bank.
Is Intuit a Good Investment?
Intuit is not a good investment right because it does not make that much money and it is overpriced. Intuit shares were trading at $117.97 a piece on April 20, 2017, which was ridiculous. There’s nothing in the company’s financial report to justify that price.
That includes the 34¢ dividend that Intuit paid out on April 6, 2017. That pay out does not seem sustainable with Intuit’s current income. Nor does the $118.17 share price and 101.6% return on equity Intuit investors enjoyed on January 31, 2017.
If you own Intuit shares, sell them now, this stock is about to take a fall in price – a big one. Everybody else should stay away from Intuit stock because there are better and cheaper financial software companies out there. A good example of such a company is Oracle which was trading at $44.49 a share on April 20, 2017, and paid a 19¢ dividend on April 10.
Intuit is not a value investment even though it meets some value criteria. Instead, Intuit is an overvalued stock that his headed for a collapse in price in the near future.