There is one guaranteed winner from the new tax bill before the U.S. Congress: Intuit (NASDAQ: INTU).
The Republicans efforts at “tax reform” are likely to make the tax code even more confusing and cumbersome, creating more demand for Intuit’s tax-preparation software. That means Intuit will end up selling more copies of Turbo Tax and Quick Books next year.
To add icing to the cake, Democrats might win control of one or both houses of Congress next year and launch their own efforts at “tax reform.” If Democrats get control of Congress and the White House in 2020, even more, radical changes to the tax code are likely. That will add yet another layer of confusion and complexity to the income tax process, and create more demand for Intuit’s products.
This gives Intuit an almost perfect business because Uncle Sam keeps creating more customers for it. That’s really good news for a company whose business is already growing like a weed.
Intuit is growing like Mad
Intuit saw its revenues grow by $525.50 million during the 12 months between October 2016 and October 2017.
The accounting software giant reported $4.759 billion in revenue on Halloween 2016 and $5.285 billion on October 31, 2017. Intuit’s revenues grew by around 10% without tax reform. Just imagine what will happen after Congress gets done “fixing” the tax doe with lots of input from Intuit lobbyists.
Intuit Inc. spent around $2.4 million on lobbying in 2016, Open Secrets reported. That seems like money well spent to me. The company also spent another $1.74 million in lobbying this year; that seems like money well spent for Intuit stockholders, although taxpayers might disagree.
Is Intuit Making Money?
Taxpayers that want to get some of their money back by buying Intuit stock will ask is: Intuit making money?
The answer to that question is yes, Intuit reported a net income of $984 million on October 31, 2017. That figure was slightly higher than the $980 million reported in October 2016.
Despite the income, and growing revenues, Intuit is losing money elsewhere; it reported a negative profit margin of -1.92% on 31 October 2017. The company also reported a negative free cash flow of -$128 million on Halloween Day, 2017. That might be an accounting trick because Intuit reported a negative cash flow of -$291 million on October 31, 2017. Negative cash flows were also reported in 2014 and 2015, according to our friends at ycharts.
There is a growing cash from operations at Intuit it reported $1.726 billion in cash from operations on October 31, 2017. That was up from $1.443 billion in October 2016.
Intuit has very Little Value
Intuit has very little value despite its growth in cash from operations and revenue.
Intuit reported $777 million in cash and short-term investments for third quarter 2017. That is low for a software company, Activision Blizzard (NASDAQ: ATVI) reported $3.576 billion in the bank on September 30, 2017. Take Two Interactive (NASDAQ: TTWO) reported $1.263 billion in cash and short-term investments on 30 September 2017.
Intuit’s assets were also very small just $4.064 billion on 31 October 31, 2017. The low asset and cash figures mean that Intuit was grossly priced. The $155 share value, $39.63 billion market capitalization, and $39.78 billion enterprise value reported on 11 December 2017 were totally unjustified.
My take is that Intuit is a company operating on the edge of collapse because it has little extra cash or value. I would not be surprised if this company collapses or ends up selling itself to a competitor or private equity firm to prevent the death spiral in the near future.
Stay Away from Intuit
Investors should definitely stay away from Intuit the risks this company faces simply outweigh the 82.84% return on equity investors received on October 31, 2017.
Even the 39¢ dividend; paid on October 6, 2017, adds little value to this company. The risk of the low amount of cash simply outweighs the dividend gains at Intuit. The dividend grew by 5¢ in 2017, rising from 34¢ in July to 39¢ in October. It also grew from 30¢ in 2016 to 34¢ and 39¢ in 2017.
The potential threats to Intuit are numerous, beyond the creation of a rational tax system in the United States; which is about as likely as Tesla making money, there are technological threats. The greatest is artificial intelligence (AI), the obvious threat there would be cloud-based AIs that do taxes. A cloud-based AI that does taxes in the Ethereum blockchain might be the death blow for Intuit.
There are better, cheaper software companies than Inuit out there, and some of those firms make lots of money and pay great dividends. Good examples of such companies are Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORC). If you want to preserve your portfolio’s value stay away from Intuit, but seriously consider using its tax preparation software.