If you do your own taxes, receive invoices from a contractor you’ve worked with, check your credit score, or are on any email lists, chances are you’ve used an Intuit (INTU) product. Intuit products are so ubiquitous that TurboTax has become synonymous with tax filing season itself, and QuickBooks is at the heart of how many small businesses operate. Credit Karma and Mailchimp, two recent acquisitions, give Intuit even greater reach into related services.
“Intuit has really strong, recognizable brands and great innovation, and that’s the basis of its competitive advantage, so it’s hard for competitors to unseat them,” says Kevin Walkush, a Jensen portfolio manager who heads up the Intuit coverage at the firm.
A quality player many times over
Jensen’s investment style across all its strategies rests on a metric of quality. At Jensen, quality has a very specific meaning: Each stock must post returns on equity (ROE) of at least 15% for each of the past 10 years, as determined by the Jensen Investment Team. That threshold, along with a market cap requirement, yields a focused universe of companies that have a high likelihood of passing Jensen’s rigorous fundamental research process.
Even with this high bar, Intuit still stands out with a 10-year average ROE of 47.7% as of August 23, 2022. Intuit is able to achieve that profitability by being in a business with such a high barrier to entry. Take tax, for example. Tax preparation is enormously complicated, and laws change constantly.
“If you’re already using TurboTax, there are few reasons to switch to another tax prep software,” Walkush says. “They take something that’s complex and make it much simpler.”
Walkush likens Intuit to Apple, which uses complex technology on the back end yet provides users with approachable customer-facing products that become indispensable. “That’s a formidable position for any company,” he says.
In recent years, QuickBooks has benefited from the strong economy, particularly the record number of new business formations in the wake of the pandemic. A newly minted virtual fitness instructor needs to manage their books somehow.
If you’re already using TurboTax, there are few reasons to switch to another tax prep software. They take something that’s complex and make it much simpler.
Decades of innovation
Many of the technology companies founded in 1983, the year Intuit was founded, have long disappeared from the scene. But Intuit has shown time and again that it can reinvent itself for the moment. In recent years, that has included a move to the cloud, which resulted in a subscription basis for its products. Intuit has also begun making greater use of artificial intelligence to simplify tax and accounting for users.
“Now it’s more of an annuity business, which we really like,” says Walkush about the move to the cloud. “And that builds on another competitive advantage, namely switching costs. It’s hard to switch tax or accounting software providers once you get started with one company, so customers are more likely to stay with Intuit.”
Another innovation is TurboTax Live, a service that lets do-it-yourself tax filers speak with a live accountant for additional support.
“What they found was they could increase the stickiness of consumers staying with TurboTax if they could offer professional service and support,” Walkush says.
The recent acquisitions of Mailchimp, a customer resource management system, and Credit Karma, which provides credit scores and creditor monitoring, allow Intuit to further build out its financial services offerings. What’s more, we believe Intuit’s leading position gives the company pricing power in today’s inflationary environment, Walkush says.
Headwinds are possible, but Intuit’s position is strong
Naturally, Walkush and the Jensen Investment Team are mindful about potential challenges for Intuit in a sour economy.
Among the risks is the continuing integration of Mailchimp and Credit Karma. Those acquisitions were done in late 2020 and 2021, respectively, and equaled more than $19 billion. Walkush calls the acquisitions “game changers” because they give Intuit the ability to move into related businesses, but the price tag was significant.
However, it’s still early days, and only time will tell if Intuit is able to integrate the businesses successfully.
Further, a recent settlement with all 50 states and the District of Columbia hit TurboTax with a settlement of $141 million to repay 4.4 million low-income customers who were charged for using TurboTax Free Edition between 2016 and 2018. Nonetheless, the dollar amount relative to Intuit’s revenues doesn’t concern Walkush.
“For context, the TurboTax business had $3.6 billion in revenue last year,” Walkush says. “While the fine is meaningful, it isn’t that impactful to the business.”
Finally, a cooling economy can put the brakes on revenue.
“The biggest risk to Intuit is if we start seeing a rash of bankruptcies,” says Walkush. “In a recession, small companies companies could file for bankruptcy and gig workers will no longer be working.”
But Intuit’s position should help it weather disruptions, Walkush believes. If anything, Intuit could pick up market share if smaller, younger tax prep and accounting software providers fail.
“We currently don’t see a high risk that they could breach our return on equity threshold,” he says, proving yet again that quality is a best defense against tough times.
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The company discussions in this article are solely intended to illustrate the application of our investment approach and are not to be considered a recommendation by Jensen. The specific securities identified are taken from a representative account of each of the Jensen Global Quality Growth Composite and the Jensen Quality Growth Equity Composite and do not represent all of the securities purchased and sold for the Strategies. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
The information contained herein represents management’s current expectation of how the Jensen Global Quality Growth Strategy and the Jensen Quality Growth Strategy will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the Strategies and accounts invested in the Strategies to deviate from stated investment objectives, guidelines, and conclusions stated herein.
Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Jensen Investment Management, Inc. is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.
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