Intuit (NASDAQ: INTU) has set the stage for record-breaking earnings in Fiscal 2023 (which ends on July 31, 2023), following a strong performance during the first half of the year. The company is enjoying favorable momentum across the board, displaying the resilient qualities of its business while retaining strong margins. In the meantime, management has been rewarding shareholders with growing capital returns. That said, the stock appears notably expensive despite its significant decline from its past highs. Therefore, Intuit could have further downside potential. These factors collectively make me neutral on the stock.
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Another Year of Record Earnings in the Making
Intuit’s remarkable track record of achieving record earnings year after year has been nothing short of impressive. And this fiscal year, it’s no different. The company’s performance during the first half of the year has demonstrated the resilience of its tax preparation solutions. This area is highly recession-resistant and predictable due to the inescapable nature of preparing taxes.
This has resulted in impressive customer retention rates, which, combined with a growing number of new small businesses, self-employed individuals, and entrepreneurs embracing Intuit’s products, has allowed the company to continue reporting robust revenue growth while other tech sectors struggle.
In its most recent Fiscal Q2 results, Intuit retained its momentum, growing its “Small business and Self-Employed Group” revenues by 20%. The company’s “Online Ecosystem” revenues also advanced by an impressive 24%, while “Consumer Group” revenues grew by 26%.
Unfortunately, the success in these segments was slightly offset by a decline of 16% in “Credit Karma” revenues due to challenges in personal loans, home loans, auto insurance, and auto loans. Nevertheless, Intuit’s total revenues grew at a pleasing rate of 14%, reaching $3.0 billion.
Intuit was also able to leverage its high-margin business model to continue to drive economies of scale. While the company’s revenues grew by 14% for the quarter, its total costs and expenses only grew by 5.7%. Thus, Intuit’s adjusted earnings per share skyrocketed by 42% to $2.20.
With revenues and profitability during the first half of the year matching management’s previous expectations, they reiterated their full-year guidance for Fiscal 2023. Management now anticipates full-year revenues to land between $14.035 billion to $14.250 billion, suggesting year-over-year growth of approximately 10% to 12%.
It appears like a prudent outlook, as it implies a notable deceleration during the second half of the year. Still, Intuit’s management is known for its tendency to beat its estimates. Further, adjusted EPS is anticipated to land between $13.59 and $13.89, suggesting a growth rate of about 15% to 17%.
Earnings Growth Drives Capital Returns
Intuit’s exceptional earnings growth has translated into increasingly generous capital returns for its shareholders in the form of both dividends and share repurchases. The company’s commitment to rewarding its shareholders is evident in its latest dividend increase of 15%, representing the 11th consecutive year of dividend hikes.
Further, the company has been ramping up repurchases. In Fiscal 2022, Intuit repurchased $2.5 billion worth of stock, up from $1.4 billion in Fiscal 2021. Positively, repurchases are quite likely to hit another record this year, as they already amounted to $1.02 billion during the first half of Fiscal 2023 versus $874 million in the prior-year period.
Intuit’s capital returns may currently be considered modest, with a dividend yield of just 0.72% and a slow pace of buybacks that can retire only around 1% to 2% of the company’s shares per annum. However, the company’s potential for long-term growth in shareholder rewards remains promising. This is thanks to its impressive earnings growth rate and low payout ratio of 23%, which allows for a long runway to increase shareholder rewards over time.
Is INTU Stock a Buy, According to Analysts?
Turning to Wall Street, Intuit has a Strong Buy consensus rating based on 14 Buys and two Holds assigned in the past three months. At $488.88, the average Intuit stock forecast implies 10.5% upside potential.
The Takeaway
Intuit’s valuation is something that has concerned many prospective investors over the years, as the stock has historically traded at high multiples. Now, the stock is currently trading about 39% lower than its November 2021 highs. In the meantime, earnings have grown significantly. And yet, Intuit is still trading at a rich 32 times forward earnings multiple (at the midpoint of management’s guidance), implying a meager 3.12% earnings yield.
On the one hand, there is some justification for this premium valuation. Intuit has put out a tremendous track record of revenue and earnings growth, even during turbulent market environments like the current one.
Although nothing in life is certain, it is indisputable that paying taxes is a permanent fixture that will remain in place for the foreseeable future. Thus, investors are willing to pay a premium for Intuit’s resilient business model and dominant market position.
On the other hand, in light of current market conditions, the multiple appears excessively high, despite Intuit’s impressive double-digit growth. Furthermore, while Intuit’s capital returns are increasing, they may not be significant enough to sustain the stock against a potential correction, which cannot be ruled out given the hefty valuation. Given the potential for downside, it may be a wise move to stay on the sidelines on this one.
