Raising Intuit Fair Value Estimate on Growth Opportunities

Julie Bhusal Sharma: We are raising our fair value estimate for wide-moat Intuit to $277 per share from $199 per share, leaving the stock fairly valued. We've raised our fair value estimate for Intuit after considering a lower cost of equity and the company's potential for further operating leverage as we expect the company to continue to benefit from its transition to a subscription model.

We think Intuit will be able to yield a near 10% five-year compounded annual growth rate in revenues over the next five years, and expand operating margins by 10 points with help from both the accounting and the tax business.

In taxes, we think Intuit will be able to benefit from attracting new users due to more tax simplicity, which tends to make taxpayers more comfortable with using do-it-yourself software as opposed to going with assisted tax services, which make up about 60% of all US tax filings.

In accounting, QuickBooks has had decent success in adding new subscribers from the self-employed market due to rise of the gig economy, and we think it will continue to add subscribers off of this base.

With scale off of this growing base and more-efficient marketing spend via connecting once-discrete Intuit offerings, like Mint and TurboTax, improving operating leverage is realistic, in our view.

But all that being said, we think Intuit’s business isn’t immune from risk, which leaves the company with a high uncertainty rating. The IRS has the ability to create its own tax-filing software. However, we believe this is highly unlikely given the IRS’ resources. Still, we’ve modeled this worst-case scenario, which we think has less than 5% probability of occurring and this still leaves returns on invested capital well above the weighted average cost of capital over the next 20 years, which makes us even more confident in our wide moat.