Intuit Stock Earnings Preview: Margins And Credit Karma Woes

1 year ago

beritaja.com

Intuit (NASDAQ:INTU) has been 1 of my champion examples connected why shareholders should beryllium very observant and highly captious erstwhile a institution undergoes a monolithic displacement successful its strategy.

I first laid retired my finance thesis for nan company backmost successful June of 2021. A fewer months later, successful November of nan aforesaid year, nan stock value had already skyrocketed by astir 40% and I changed my outlook connected nan backmost of its vulnerability to momentum and immoderate early signs of a departure from its strategy.

Since I dropped my 'Buy' rating, Intuit's banal has dropped by astir 33% while nan broader marketplace declined by 12%. Most of that diminution occurred during 2022, erstwhile I continued to definitive my captious opinion connected this caller maturation strategy.

As equity analysts stay bullish connected nan stock, I americium now very observant arsenic Intuit is scheduled to study its 2nd 4th results adjacent week.

Is Intuit's Profitability Becoming An Issue?

One of nan awesome developments that I will beryllium intimately pursuing during nan upcoming results is Intuit's profitability. During nan past fiscal twelvemonth and nan first 4th of fiscal twelvemonth 2023, nan company's margins continued to deteriorate astatine a very accelerated pace.

This has been happening moreover arsenic nan Small Business & Self-Employed section has been firing connected each cylinders of precocious and deed a record-high nett gross and operating profit numbers.

Total gross maturation was fuelled by nan Small Business & Self-Employed Group revenue growth of 38% aliases 19% excluding Mailchimp and 25% gross maturation successful nan Consumer Group driven by a strong October highest pinch caller customers and hold filers.

Source: Intuit Q1 2023 Earnings Transcript

There are a number of reasons for this diminution successful margins - from nan caller acquisition of Credit Karma, which has importantly little margins than Intuit's bequest business, to overmuch stronger reliance connected M&A deals. The second leads to higher expenses related to amortization of intangible assets and skyrocketing stock-based compensation expense, which reached 35% of nan company's rate travel from operations during nan past 12-month period.

Unfortunately, nary of these items are expected to person a little effect going forward. The monolithic share-based compensation packages are basal to clasp talent and immoderate of nan caller M&A deals besides had a profound effect connected this item.

The logic why this is truthful alarming is twofold:

Firstly, Intuit's premium valuation relies heavy connected nan company's historically precocious margins.

As we spot successful nan chart above, however, since 2021 nan company's Price-to-Sales aggregate has go detached from nan company's margins. There is tremendous consequence of downward aggregate repricing, should investors' expectations capitulate and marketplace participants go convinced that Intuit would not beryllium capable to return to its humanities profitability.

Secondly, Intuit's maturation strategy appears excessively stretched and relies heavy connected acquisitions.

Usually, this should not beryllium a problem successful and of itself, nevertheless location are early signs that Intuit could beryllium overpaying importantly for its acquisition targets.

Early Warning Signs

During nan past quarterly report, it became clear that nan caller mega woody for Credit Karma is turning sour (if not into a imaginable disaster). Management was blaming economical uncertainty for Credit Karma's little than expected revenues, nevertheless we are yet to witnesser nan existent effect connected revenues of a awesome economical slowdown. Moreover, a diminution of 15% to 10% from an expected maturation wrong nan scope of 10% to 15% is simply a awesome of much problems down nan road.

However, we proceed to spot partners propulsion backmost from extending credit, reflecting nan uncertainty successful nan economical environment and nan consequence of deterioration successful in installments performance.

Given this context, Credit Karma gross came successful little than expected for nan quarter. We are lowering our fiscal twelvemonth 2023 gross guidance for Credit Karma to a diminution of 15% to 10% versus our erstwhile guidance of 10% to 15% growth.

Source: Intuit Q1 2023 Earnings Transcript

With nan astir caller acquisition of SeedFi, Intuit's guidance is besides doubling down connected its efforts to grow into user credit.

Given nan troubling capacity of Credit Karma and nan higher consequence of an summation successful delinquency rates and slowdown successful user in installments successful 2023, investors should beryllium very captious of this latest deal.

Intuit's guidance is besides moving nan consequence of becoming excessively stretched successful its maturation strategy. The caller acquisition of Mailchimp, for example, involves an eager scheme to create a trading automation, CRM and e-commerce suite.

We person 3 acceleration priorities pinch Mailchimp: first, delivering our imagination of an end-to-end customer maturation platform; second, disrupting nan mid-market by processing a afloat trading automation, CRM and e-commerce suite; and third, accelerating world maturation pinch a holistic go-to-market approach.

Source: Intuit Q1 2023 Earnings Transcript

The strategy would besides impact person integration betwixt Mailchimp and QuickBooks pinch nan purpose to present cross-selling opportunities and a unified mid-market platform. On insubstantial this sounds very encouraging, however, fixed a very wide scope of services and Intuit's M&A-led maturation strategy creates important risks of nan institution importantly overpaying for growth.

Conclusion

After a disastrous twelvemonth for Intuit's stock price, investors should beryllium moreover much captious of nan company's existent maturation strategy. Historically precocious margins should not beryllium sacrificed for nan liking of an fierce description into areas wherever nan institution will person a difficult clip competing. Moreover, location are already signs that Intuit mightiness beryllium overpaying for immoderate of its very caller acquisitions which raises much questions regarding nan company's acquisition-led strategy.

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