Description

Short INTU

Intuit (NASDAQ: INTU) is a provider of financial management software to small and medium-sized businesses, and consumers. The Mountain View, California-based company operates three core franchises:

1. Quickbooks, SMB accounting software
2. TurboTax, consumer tax filing software
3. Credit Karma, a consumer financial management platform

In summary:

• Intuit’s recent acquisitions of Credit Karma and MailChimp, which we believe were made to mask slowing growth in the core business, have introduced an underappreciated level of economic sensitivity (lending, martech) to a historically low beta business.
• While Intuit dramatically lowered guidance for Credit Karma, from +10-15% to -15% to -10%, consensus for FY24 will likely have to come down further as the economy slows and lenders/card issuers gradually tighten their credit books.
• Intuit’s saturated tax filing business could fall short of their 9-10% Y/Y target given our view that underlying unit growth will revert lower.
• Core QuickBooks Online Accounting revenue fell short of consensus in 1Q, suggesting that the company is beginning to see signs of weakness within its SMB customer base. As we move past the price increases enacted in F1Q it’s likely that weakness becomes more evident in reported results.
• Risk / reward is very attractive given the current EPS multiple on Street expectations that have a decent amount of risk.

Details:

Credit Karma (15% of revenue)

Credit Karma is a personal finance platform that was acquired by Intuit in December of 2020. Its primary source of revenue is upfront fees paid by lenders upon the successful underwriting of a loan or the issuance of a new credit card. Credit Karma is a business that thrived in a low interest rate environment, but relies heavily on non-recurring revenue and, therefore, introduces an acute level of economic sensitivity to Intuit’s business model.

In terms of the business performance, just a month after management reiterated its 10-15% guidance for Credit Karma revenue growth at their financial analyst day, an internally circulated memo was leaked to the press noting that Credit Karma was pausing “almost all new hiring” due to “revenue challenges.” In 1Q, the company reported $425M in Credit Karma revenue, +2% Y/Y as reported, but we estimate -9% Y/Y organically as the company reclassified an estimated $40-45M of its Mint brand revenue into Credit Karma results during the quarter. During the company’s 1Q23 call management reduced guidance for Credit Karma to -15% to -10% Y/Y, implying an exit rate of $340M or -28% Y/Y for the core business (ex-Mint). With card issuances/personal loans likely to continue to gradually tighten into INTU’s FY24, the consensus implied reacceleration in growth appears highly ambitious. Instead, we assume that Credit Karma continues to taper off back towards F3Q21 levels of $316M in quarterly revenue, implying 12%+ downside to next year’s consensus numbers.

TurboTax (30% of revenue)

TurboTax, INTU’s core consumer tax franchise, receives arguably the least amount of scrutiny from investors which is surprising as it generates nearly 40% of operating income. Over the last three years the company has benefited from a material reacceleration in paid unit growth (from 0.4% Y/Y in FY19 to 5.8% Y/Y in FY22), which can be attributed in part to the 10M increase in total returns filed as stimulus payments were determined by prior-year tax returns. Given this dynamic, we see an increasingly high likelihood that unit growth will be flat to down. That compression will only be exacerbated in FY24 as unemployment rises, when the IRS also expects total returns to be down 1.6% Y/Y.

The other side of TurboTax revenue is a complex mix of SKUs, pricing, and discounting which boil down to an average revenue per return (ARPR). The last few years ARPR have benefitted from upsell of the TurboTax Live offering, which allows filers to consult with a live tax expert for a list price of $89+. However, since its launch, the incremental penetration of TurboTax Live has fallen each year with only 400bps incremental penetration added last year vs 640bps in the prior year. We expect penetration to continue to plateau, which is supported by INTU’s decision to raise list prices on Live by 5-13% this year (realized increases will be lower due to discounting). We expect this to only reduce the attractiveness of the offer vs. self-service. Outside of TurboTax Live, we expect the core ARPR growth to be flat to down given mix-shift pressure from downgrades to Deluxe ($59) from Premier ($89) based on lower equity and crypto market participation. Factoring all this in, we arrive at 4.5% paid ARPR growth on 35.3M paid filings or $4.0B in revenue vs consensus of $4.3B.

Small Business & Self Employed (55% of revenue)

The Small Business & Self Employed segment encompasses QuickBooks Online Accounting, Online Services, and QuickBooks Desktop. Like Credit Karma as recently as September, management continues to insist that QuickBooks is not facing any macro pressure. Yet, despite a 6-20% QBO price increase which began in July, the core QuickBooks Online (QBO) software missed consensus numbers in 1Q, decelerating by 500bps Q/Q to 28.7% Y/Y growth, which we see as a clear indicator of lower gross adds and rising churn. The other portion of QuickBooks (payroll and payments) has remained resilient thanks to a 25% price increase also enacted in July. However, given the outlook for rising unemployment and broadly slower SMB transaction growth (as indicated by Moody’s Cortera data), we expect that Online Services will also decelerate as we get further past the price increase.

Downside:

Where do we think INTU goes from here? Given downside to consumer tax, increased signs of stress within SMB, and the potential for prolonged weakness in Credit Karma, we believe this business warrants a lower multiple than Microsoft which is currently trading at 25x NTM EPS. We note that management’s EPS guidance is significantly more backend weighted than in prior years, and we arrive at our own adjusted EPS estimate of $13.16 this year or 4% downside vs. Street. Our conversations with several large holders have pointed to price targets at or near current levels, which is supportive of a favorable risk/reward skew for the short.

Catalyst

• Earnings/guidance
• Consumer credit performance
• IRS tax season updates