Intuit - Business Breakdown

60-page deep dive on Intuit, an AI beneficiary?

Software ate the world. Now AI is eating software. That’s the current investment narrative out there.

Mass uncertainty is being created by OpenAI. Software firms with previously insurmountable moats are now coming under question - are they AI proof?

I covered this topic in my Process Power article, with the key takeaway that some will benefit, some won’t.

I think one such beneficiary is Intuit.

It’s not the obvious name, but Intuit has repeatedly reinvented itself in the face of disruption. This time is no different.

A look at its history shows a company shaped not by pure chance or luck, rather an inherent focus on the future and deliberate strategic choices to avoid obsolescence.

In this business breakdown, I will dive into the below:

• History

• Industry

• Business Model

• Competitive advantages

• Unit Economics

• Runway

• Financials

• Management

• Risks

• Valuation

• My view

History

Intuit’s story is very good.

The business began from an idea. Founder Scott Cook noticed his wife struggling to balance the home checkbook and bills. He realised the issue was also a common pain point in other households - the market software was clunky and complex. Most households relied on pen, paper and documentation.

Cook had the idea, but he couldn’t code. So he set out to find a university student to potentially do this as an employee.

As Cook was searching for developers, he came across Thomas Proulx - a student in his final year actually looking to start his own business. The rest is history.

Together, the two founded Intuit in 1983 and launched Quicken, a personal finance tool. While it is no longer part of the business, the foundations of Quicken are still core to what they do today.

The company was bootstrapped from family and some other investor funds. Intuit barely stayed afloat and had to even stop paying staff at one point. It was a story of grit and resilience.

Eric Dunn joined in 1986 as CFO and would hold multiple roles to help with finances and product development. The turning point was when Quicken was rebuilt, found product market fit and aggressively marketed.

The below is a key timeline of events for Intuit.

Intuit has had to continuously reinvent itself since inception. Current CTO Alex Balazs who has been with the business since 1999 explains:

As we’ve hit each of these kind of platform shifts from being desktop to online, online to SaaS, SaaS to platform, platform to data and AI, and now truly becoming this AI-driven expert platform, what I’ve seen is we reinvent ourselves.

Intuit has successfully navigated major technology shifts from DOS to the web, to mobile, to the cloud and now to AI. Along the way, the company faced multiple disruptive threats that forced Intuit to embrace uncertainty and at times, shift its business model. This willingness to change has enabled the business to transition to the current AI era, whilst many others have faded away.

The most recent was the cloud transition. In 2013, Intuit started aggressively shifting customers from its desktop application to the cloud.

Intuit pushed for the migration despite the multiple risks including customer churn and lower near-term monetisation (from a one-time perpetual license fee for a software CD to a recurring subscription-based service). Leaders in other markets were slower to adapt such as MYOB in Australia and Sage in the UK, making their eventual transitions more challenging.

The shift impacted near-term financials with Intuit disappointing revenue in 2015, triggering a 13% and then 29% drop in the stock over four trading sessions. It seems like a minor blip now, but this strategic shift laid the foundation for Intuit’s current strength.

Now the group faces perhaps its most disruptive moment yet, AI. But unlike many other firms, Intuit has already survived multiple disruptive threats and knows what needs to be done.

CTO Balazs paints the picture well and quotes Clayton Christensen’s famous book, The Innovator’s Dilemma:

We're constantly reinventing ourselves, and that's one of the reasons why it's been so amazing to be there for such a long time, because as we've hit each of these kind of platform shifts from being desktop to online, online to SaaS, SaaS to platform, platform to data and AI, and now truly becoming this AI-driven expert platform, what I've seen is we reinvent ourselves. And so, that reinvention certainly manifests itself in terms of the choices that we make about our technology stack and how we build products and how we market our products. But also, it connects to how we actually interact with our customers and monetize and commercialize what it is that we do….And so, when I think back 25 years ago, some of the original things that we did to where we have evolved as a company, to be this all-in-one platform, I think it's been a testament to, as I said, this reinvention and this idea that – it's a classic book, The Innovator's Dilemma, and that we constantly kind of power through the innovator's dilemma.

For those interested, I would recommend the Intuit Story below, illustrating the humble beginnings, the common sense approach and key lessons in building the behemoth it is today.

Global Business Solutions Group (GBSG)

I will break down this report into two sections, first GBSG, then Consumer Platform. GBSG accounts for around 60% of group revenue, is the core business driver and remains Intuit’s highest quality segment. It develops the QuickBooks brand which holds the dominant market position in the US.

Why is SME Accounting Software Attractive?

Most small businesses only need a few essentials:

• Customers and sales to grow

• Capital equipment and supplies

• Staff to operate the business

• Business location

• And some more

How do they keep on top of this?

This was historically managed using pen, paper and excel. Today, it’s increasingly done through software.

Accounting software integrates the day to day operations and financials onto the one platform - enabling owners to manage and track business changes in real-time. These platforms are evolving into an all-in-one platform with access to payments, credit, payroll, marketing and more.

Accounting software is the operating system for businesses - much like how Windows is the desktop operating system and iOS is Apple’s mobile operating system.

The software is used daily and is embedded into workflows and processes, while accumulating vast historical data and deep employee knowledge. It is thus mission-critical to SMEs. Switching to a new system involves not only financial cost but also significant procedural and learning costs.

Core software costs anywhere from $10-$150 per month which in the scheme of things is pretty low. This combination of low costs and high criticality drives further switching costs.

These platforms have latent pricing power and can consistently grow by driving increased services uptake.

It is a highly attractive business model. The only reasons customers leave is if:

1. They go out of business

2. Their needs outgrow the platform’s capabilities

3. They are willing to endure the costs to switch to a better/ more suitable platform

Churn for Intuit is 17% and mainly comes from customers going out of business (1/2 US business fail in the first 5 years). Xero, the dominant player in Australia and New Zealand (ANZ) has churn of 10% in its core market. Most customers stay once embedded.

Winner take most market?

Unlike enterprise accounting software, there is no single leader in the SME space that is dominant across multiple markets. Instead, there are various players with leadership in only one market. These are:

• Intuit - US (>80% share)

• Xero - ANZ (75% share)

• Tally - India (70-80% share)

• Fortnox - Sweden (>60% share)

The software isn’t easily transferable given the local tax, regulatory requirements and cultural differences. Software needs to largely be built from the ground up to achieve product market fit which takes years of sustained, evolutionary process. The complex and opaque nature of developing the software drives process power.

While the significant investment across research and development (R&D) and sales and marketing (S&M) brings scale economies, a further barrier.

Winning the accountant channel is another critical driver. Most SMEs rely on accountants rather than in-house finance teams. They are usually guided by accountants for software.

The accountant is thus a key partner. The software providers that can effectively integrate and incentivise accountants, usually end up becoming the market leaders. This is because accountants are the key drivers of referrals and the majority of new subscribers.

Fortnox, for example, has become the clear market leader by winning the Swedish accountant channel.

Intuit, Xero and Tally have all done the same.

This creates a self-reinforcing network effect: the more accounting partnerships a platform has, the more users it attracts, which in turn draws even more accountants.

Overall the barriers for new and existing players is high, including:

• Network economies

• Scale economies

• Process Power

• R&D and go to market

• High switching costs

These dynamics generally make SME accounting software a “winner-takes-most” market.

Competitive Advantages - QuickBooks US

QuickBooks is dominant in the US. The company exhibits the competitive advantages described above.

It has a large share of the accounting channel. Intuit’s ProTax product is sold directly to professional accountants and integrates seamlessly with their internal systems. Automation, cloud and AI enhancements allow accountants to view all client data in a single dashboard, saving significant time and effort.

This strategy has entrenched Intuit in the accounting channel, driving significant referrals. Online data suggests Intuit has over half a million accountant partners globally.

As explained above, this creates a self fulfilling network effect where more accountants leads to more new business customers thereafter driving more accountants to the platform.

Intuit was also the first to market. This helped scale its ecosystem to 10m total subscribers, with 5m US online paying subscribers. Rapid subscriber growth has driven scale economies.

Gross margins are likely above 80% and segment operating margins continue to rise. Scale economies enables Intuit to invest vastly more than peers in R&D and S&M. See my below estimates for total company spend across peers. Intuit’s spend as a proportion is significant and continues to rise.

Whilst the cloud has reduced the barriers to entry for start-ups and opened the market for disruption, Intuit has only seen one prominent entrant - Xero. In order to compete, Xero has needed to reinvest ahead of profitability. The company only recently became cash profitable after years of growing expenses more than revenue. This highlights the significant barriers to entry.

QuickBooks main competitive advantages are:

• Scale economies

• Network economies

• Switching costs

These create high barriers to entry, allowing QuickBooks to command premium pricing and readily increase prices.

Value Proposition

In technology, competitive advantages can erode quickly. It is important to have a superior product that customers love.

As the operating system for SMEs, the software must be easy to use, intuitive and comprehensive.

QuickBooks has long offered broad functionality but for a period it prioritised incremental features over user experience, making the platform less visually appealing and intuitive for users. A renewed emphasis on design and user experience has revitalised the product proposition.

The below shows the new US QuickBooks platform which is much cleaner and intuitive.

The platform has a range of services including:

• Bank feed integrations across the fragmented US banking system

• An integrated ecosystem with built-in payroll, tax filings, payments and time tracking

• Credit lending solutions for quick business funding

• Advanced reporting and customisation options

In addition, the regulatory and compliance rules from years of development and iteration has created another barrier, known as process power. It would require years of sustained, evolutionary process to replicate this as the software is complex and opaque. Competitors have often relied on partnerships for additional services and have been slower to implement comprehensive bank feed integrations.

Data and AI

While QuickBooks’ user interface and broad functionality are important, owning the platform and broad data lake is what drives differentiation today. Over a decade of strategic investment in data has positioned them well, with CTO Balazs noting:

The power of the data, the data is so important. And so, the investments that we’ve made in data in terms of making sure our data is clean and organized; our data services, to make sure our data is available and we can get data both locally in our ecosystem and go get it anywhere where it is on the Internet and make it available to our customers; and then, how you actually leverage that in your AI, critical, critical part of our AI strategy.

Acquisitions like Credit Karma and Mailchimp have further expanded Intuit’s data across consumers and businesses. The group now has access to 86m consumers and 10m businesses.

By owning the data on an integrated platform, Intuit can leverage the power of AI to automate a range of tasks such as:

• Categorising transactions

• Reconciling books

• Managing invoices

• Spotting leads

• Drafting emails

• Analysing financial data

Intuit is also augmenting AI with live experts to solve complex tasks and provide customers with more certainty. The value proposition includes:

• Less time spent on mundane tasks

• Getting up to speed on the business and key issues

• Faster onboarding

• Streamlined payments

• Problem solving

This is reducing customer friction. It also increases service uptake, thereby driving engagement and retention.

For competitors, catching up is extremely difficult given the range of competitive and data advantages. And as Intuit continues to deliver more product velocity, its competitive position should widen further. This is why US QuickBooks should remain the dominant player.

Pricing

QuickBooks is the premium proposition in the US due to its strong value proposition and high switching costs. In addition, the low total cost of ownership and mission critical nature of software means churn is low even in periods of high price increases. QuickBooks therefore has latent pricing power.

Pricing has ramped in the US from 2020 by an average annual rate of 11%.

Xero has followed with similar price increases, averaging 16% since 2021 - although starting from a lower base.

Businesses and accountants are never going to be happy with price rises. Intuit balances hikes with additional product value. This year, customers benefit from a refreshed platform and new AI agents, which can reduce the time spent on previously manual tasks.

Future price increases are expected to be a lower contributor with CFO Sandeep Aujla explaining:

And expect pricing, continued strong pricing power for our business. And that's a pricing power we'll continue to take over the next multiple years. But as you look across the next year, we want most of our growth to come from volume and mix, and that will continue to be the case. And in fact, next year, on a point of revenue growth, price will be a smaller contributor to GBSG's revenue growth than it was this year.

Price increases are important but will be incremental going forward. The other drivers are subscriber growth and product mix which I will detail below. The core accounting offering has consistently growth >20%.

Services

In addition to core accounting revenue, QuickBooks monetises via additional services.

The company is positioning itself as an all-in-one platform, with the aim of consolidating the 3–15 apps that businesses use. This reduces friction, costs and integrates everything to be able to leverage the true benefits of AI.

Intuit is building its own services and partnering with other leading players. Services include payments & bill pay, banking, workforce, capital, marketing solutions and more.

The three predominant services categories are:

• Money - payments, bill pay and capital

• Payroll (Workforce Solutions)

• Mailchimp - marketing

Revenue is pretty evenly split among Money, Payroll and Mailchimp.

Growth is being driven by Money and Payroll while Mailchimp has lagged.

Money

Money revenue comes from merchant payment processing, bill pay, checking accounts and financing for small and mid-market businesses. Revenue has grown at 40% annually over the last two years, mainly driven by online payment volumes.

QuickBooks processes around $174b of payments. The opportunity is to capture the more than $2t of payments on its platform and also expand into the larger addressable opportunity. The business is also expanding funding options for customers to readily access credit.

Workforce Solutions

Workforce Solutions consists of QuickBooks Online Payroll and QuickBooks Time. In 2017, Intuit acquired TSheets, a best-in-class payroll solution, and subsequently integrated this into its platform.

Payroll is sold on a subscription basis, typically alongside QuickBooks. Time tracking is an add-on used to manage mobile workforces. Revenue comes from a fixed subscription fee plus a variable component based on the number of employees.

Growth has been fueled by increased payroll adoption, higher effective pricing and a shift toward premium offerings. Revenue naturally rises as businesses expand their employee bases.

Mailchimp

Intuit acquired Mailchimp in November 2021 for $12b using around a 50/50 mix of cash and stock. Mailchimp is a customer engagement and marketing platform that supports front-office functions, helping businesses reach and retain customers.

Mailchimp has 13m+ users and 2.5m monthly active users. The segment primarily makes money through subscriptions with 95% recurring revenue. Half of Mailchimp’s revenue comes from international channels.

Post acquisition, Intuit brought in a new management team, localised the products and broadened functionality for mid-market customers. This shift actually saw the business lose focus on its smaller customers and led to rising churn. There has also been some internal challenges integrating the two cultures.

Former Facebook VP of Marketing Matthew Idema now leads Mailchimp, aiming to restore the segment to double-digit revenue growth.

Management is working on making the first time experience better. While the strategy is to use Mailchimp to differentiate and grow accounting software in International markets.

The acquisition has yet to justify the steep 15x revenue multiple. Growth has slowed considerably and remains in the single digit range. I expect high-single digit growth for the segment, below management expectations. In my opinion, this has been a poor acquisition.

Desktop

Intuit has transitioned from a desktop business to a cloud provider, which led to an improved customer experience and underlying business model. Perpetual one-time licences have been replaced with subscriptions, paid monthly and recurring.

The Desktop business now represents <10% of subscribers and 25% of revenue. Enterprises represent 30% of customers, who use desktop due to their sophisticated needs.

The remaining desktop users are lower-value customers who prefer the legacy version. Intuit continues to serve them, as they are profitable and stable, but no longer sells desktop subscriptions to new customers.

To migrate more desktop users to the cloud, management removed the price disparity and shifted all customers to subscription contracts, driving higher average revenue per customer (ARPC).

The result has seen Desktop Accounting revenue grow by 25% annually over the last 3 years.

The revenue tailwinds have now come to an end. Desktop revenue should grow via price rises and more enterprise customers, offset by lower total subscribers. Revenue growth should be in the low-mid single digits.

US Runway

The opportunity to grow in the US is significant. There are around 35m SMEs, and if you include sole traders this rises to 65m. Taking the more conservative SME estimate, penetration remains low.

Intuit is the US market leader with 14% share of the total pie. Estimates for Xero and Sage include Canada, inflating their true penetration. The top 3 players represent under a quarter of total SMEs with the vast majority of businesses still using some form of pen, paper or excel. This underpins the vast opportunity.

Intuit has highlighted these dynamics in the past, noting that 9 out of 10 new QuickBooks Online customers come from Google Sheets or paper. The benefits are clear - speed, accuracy and automation with AI to further drive the shift to digital.

The ANZ market provides a barometer of what US penetration could become. New Zealand has around 600k SME’s but Xero already has 629k subscribers. How does this work?

Xero continues to grow as they support more self-employed/ sole traders and businesses with multiple subscriptions. The region has seen very high accounting software penetration, with no reason why the US can’t get there over time.

Intuit is well positioned to grow subscribers at its 5-10% annual target.

Services Runway

The opportunity is even larger in services.

An estimated 80% of US businesses still pay other firms via paper cheques. The ecosystem is clearly going to digitise over time. Intuit is expanding payment capabilities, digitising invoices and deploying AI agents to streamline workflows and drive adoption.

Intuit estimates the overall TAM is $186b with the company’s share minimal.

I don’t place too much emphasis on headline TAM figures. What matters is that the bulk of the opportunity lies in services, giving Intuit a long runway for growth.

As QuickBooks cross-sells additional offerings, it increases customer lifetime value and retention. This is particularly relevant in the mid-market segment, which I’ll discuss below.

Mid-Market

One of the main reasons customers have churned is because they outgrew the platform. QuickBooks has previously lacked functionality such as multi-entity and multi-currency needed by large businesses.

Expanding into this segment made strategic sense as these “mid-sized” businesses tend to be higher value with:

• Long tenures in QuickBooks

• Larger workloads and data

• Greater services uptake

This translates into higher spend and lower churn. Intuit defines mid-market as those with $2.5m to around $100m in revenue.

CFO Aujla notes:

The size of the prize is that they have 10 to 100 employees that we can service through a payroll offering, that they’re running a lot more payment volume. So when we look at the lifetime value of our mid-market customer, the majority of that is in the services uptake. So that’s what excites us there.

After entering the mid-market, the primary objective has been to transition larger existing customers to QuickBooks Advanced and now Intuit Enterprise Suite (IES).

The value proposition is strong, especially compared to traditional ERP solutions like Oracle NetSuite or Sage Intacct which are more complex, costly and time-consuming to implement. The drawbacks of ERP include:

• Prolonged implementations with significant execution risk

• High annual subscription costs starting at ~$10k and often far higher

• Implementation costs amounting to 1.5–3× the annual subscription fee

Intuit is well positioned to disrupt this space by offering a more agile, lower-cost solution with faster onboarding and a lower total cost of ownership. See below.

Owning the platform and data gives Intuit a clear right to win. Intuit can fully leverage AI, unlike point solutions that operate in silos.

QuickBooks can now support even larger enterprises, with IES average customer spend of $27k:

Intuit Enterprise Suite is a configurable platform with payments and bill pay, project profitability, multi-entity financial management, workforce management capabilities, consolidated reporting and P&L forecasting, and marketing, all catered towards complex business needs and sold together.

Mid-market customers and ARPC have continued to increase.

The mid-market opportunity is significant, with an estimated 1.8m addressable businesses, of which Intuit currently holds 19% share. Around 800k or 40% are already within its ecosystem, creating a clear cross-sell pathway.

CFO Aujla notes:

When our teams are calling up these 1.7 million mid-market customers, half of them are already using QuickBooks. They’re realizing that upsell into Advanced is super easy because many of these customers bought QuickBooks many years ago, and they never went back to the page to see what the new lineup looked like when new introductions came in. So they upsell them into Advanced. That’s driving that growth.

Intuit is building a dedicated account management team to serve this segment, which requires a more tailored sales motion than SMBs. I expect mid-market subscribers to grow around 15%.

Services attach rates for payroll and payments are 12 points and 9 points higher than the core platform. There are more employees, more payments and more bills translating into a greater need and spend on services.

The combination of subscriber growth and rising ARPC drives mid-market revenue well above the core - it has grown 40% year on year and now represents 12% of GBSP revenue.

As mid-market scales, Intuit is becoming a better business with higher-quality, stickier revenue stream with superior unit economics.

Competition

Competition eats profits. For much of its history, Intuit has faced formidable rivals. The US accounting software market is fairly consolidated, with a handful of key players. In its core US market, the main competitors are Xero and Sage.

Xero

Xero has been the strongest competitor, entering the market with a cloud-first, intuitive product that resonated more than the desktop QuickBooks version. Its strategy was to grow subscribers quickly, which made sense in a market with high switching costs. Xero operated like an aggressive start-up, reinvesting heavily in R&D and S&M to rapidly scale.

Xero could do this as they were backed by capital markets and had exceptional unit economics. The Lifetime Value to Customer Acquisitions Cost (LTV/CAC) ratio of 12x in ANZ is incredible.

However, since 2023, Xero’s strategy has shifted. New CEO Sukhinder Cassidy has prioritised sustainable returns, growth and profitability. The company has raised prices and slowed down investments to improve returns.

Investments in R&D and S&M has reduced as a percentage of revenue.

This strategic shift aligns with management’s long-term incentives around revenue growth, FCF margins and total shareholder returns. Competitive intensity has reduced, evident in Xero’s slower subscriber growth compared to historical levels.

Xero remains dominant in its core ANZ market, with >75% market share and a similar competitive position to QuickBooks in the US. It also has solid traction in the UK.

However, the US has continued to remain a black box, with 12–13x fewer subscribers than QuickBooks. The challenge has always been going up against a scaled incumbent with a superior product and a range of competitive advantages. The below is skewed by an adjustment in FY25.

Xero is trying to make a more concerted push into the region with the acquisition of Melio, a leading SMB bill pay platform. This allows Xero to embed its own payments platform alongside the accounting and payroll (with Gusto) solutions.

The group is attempting to achieve product market fit with CEO Sukhinder Singh Cassidy noting:

Firstly, payments is a critical need for US SMBs, and importantly, they want it integrated with accounting. You can see on the left-hand side, accounting jobs such as bookkeeping and reconciliations, and payments jobs such as getting paid and managing cash flow are in the top five jobs to be done for SMBs according to our customer research.

The Melio transaction lifts NA revenue to A$235m or $155m, still a fraction of Intuit’s $10b of revenue. Still not really at critical mass.

While the region is managed rationally, with cash burn reasonable and investments to scale only as the top-line grows. There are still product improvements around bank feed integrations and services to be made.

It is difficult to see Xero gaining meaningful share given the lack of scale. Intuit’s value proposition remains well ahead and continued reinvestment should enhance this.

That said, Xero is the most credible threat to US growth. The market is large, underpenetrated and can support multiple players.

Sage

Sage is the other player. NA represents 45% of group revenue and has grown at high-single digits.

Sage is a true accounting tool with broad functionality. It has gained more prominence in the mid-market space providing a more complete view of financials. The company was late to the cloud but has made meaningful progress over the years.

Sage is managed rationally and focuses on steady margin improvements annually.

Sage Intacct, its cloud accounting solution for mid-sized businesses, accounts for 45% of NA revenue and is growing at >20%. As discussed, Intuit is making a more concerted push into this segment and will add greater competition here.

Sage Intacct requires long implementations and high costs. According to Cargas:

Sage Intacct’s annual subscription price starts at $12,000 for one business user and Core Financial Management functionality. However, on average, our customers spend $25,000 to $35,000 on their annual subscription costs.

Sage has continued to iterate they have yet to see any meaningful impact on results, likely as Intuit focuses on retaining existing customers first. Although Sage has seen revenue growth slow.

Overall, the industry dynamics are highly favourable. Intuit’s main markets are consolidated with rational competitors focused on profitable growth. Competitive intensity has also reduced following Xero’s management changes. Intuit has clear scale and network advantages that positions it well to expand its market position over time.

Unit economics

Understanding the unit economics is key to assessing whether Intuit is spending efficiently to acquire customers.

The shift to cloud and subscription revenue has transformed Intuit into a better business with recurring monthly payments rather than one-time purchases every few years.

QuickBooks retains ~83% of customers, with churn largely driven by business closures, customers outgrowing the platform or switching to alternatives. Retention has steadily improved as Intuit focuses on larger customers and expands services per subscriber.

This year, Intuit lost roughly 1.4m online paying customers while adding 1.8m, resulting in net growth of around 400k customers (assuming Mailchimp and standalone customers have similar retention). The chart below illustrates this trend.

Customer growth has slowed, with net additions dropping from 10% to 5%. International markets and Mailchimp have been a drag, while US customer growth remains solid at 8%.

Peer retention metrics imply that there is room to improve. Xero is the gold standard with 90% retention in its core ANZ market, though its International retention is similar to QuickBooks at 83%. Intuit is leveraging AI to boost conversion and retention while increased take-up of services and engagement should be a further lever.

The other aspect is ARPC. ARPC has grown ~12% annually over the past five years, driven by price increases, service uptake, product upgrades and a shift toward higher-value customers. Intuit has outpaced Xero in ARPC growth.

My net revenue retention estimates are 95–100% for QuickBooks and ~100% for Xero ANZ. Sage posts 101% renewal by value, reflecting its larger, stickier customer base.

LTV has continued to grow strongly, enabling Intuit to sustainable reinvest in customer acquisition costs. I forecast this to continue.

My overall estimates for LTV to CAC range from 2-4x - a leading metric for a software business. There is opportunity to improve this as the network effect increases, with Xero ANZ exhibiting much higher ratios.

International

The International segment mainly consists of the UK, Australia and Canada. There are 2.5m subscribers, which represents half of the US number. Revenue only represents 8% of total net revenue or 14% of Business Revenue. This implies lower ARPC and margins.

Achieving product market fit has been tougher. Competition is also more pronounced - Xero dominates in ANZ while Sage and Xero have solid offerings in the UK. International has struggled in recent years, with my estimates showing a slowdown in customer growth.

Xero has largely outpaced Intuit in International growth (have bucketed Xero subscribers into ANZ, UK and ROW).

Management continues to highlight the importance of the segment. The company has refreshed some of the management team and is using the combined Mailchimp and Quickbooks approach to differentiate itself.

The runway for growth is more limited compared to the US. The UK SME market is close to 50% cloud penetrated while ANZ is already largely saturated. Meaningful expansion will be challenging and I do not forecast progress here.

Revenue Profile

The dominant competitive position, long runway, pricing power and mix-shift enables Business revenue to grow at low-mid double digits. Stronger mid-market growth can offset modest International growth.

QuickBooks Online Revenue can sustainably grow at high-teens driven by mid to high single digit customer growth and low to mid double digit ARPC growth.

Desktop revenue can grow at low single digits following a period of higher growth. See below overall revenue profile.

Generative AI

The key question is why can’t large language models (LLMs) or AI-first companies disrupt QuickBooks.

The first thing to note is that businesses need some sort of platform. AI agents can perform tasks but the data needs to be stored somewhere to view over time.

The most likely disruption would come from an AI-first company leveraging LLMs. The new business would face the multiple barriers to entry as described above.

They would need build a platform, a range of services and product market fit, which is not a straightforward rather iterative process.

3/4 of referrals come from accountants, with the need to win and scale the accounting channel.

The new player would also need to switch over competitor customers and grow other new software customers.

It is not impossible, but very difficult.

The other threat comes from customers outsourcing a range of tasks to AI agents. QuickBooks has the advantage with the breadth and depth of data. This is explained by CTO Balazs:

But really, when I think about the lessons that we’ve learned about leveraging AI, creating impactful AI, the first part of it is, boy, the data has to be there. And so, with the large set of data that we have at Intuit, hundreds of thousands of attributes about every business, about 60,000 attributes for every consumer that’s on our platform, we can actually leverage that data.

Intuit has launched AI agents that work seamlessly together, leveraging its extensive data and services to automate tasks for customers. Intuit has invested ahead of the curve and is well positioned to actually win here. The goal is simple with CEO Goodarzi noting:

We want to build experiences where the work is done for customers. And in order to do that, we have heavily invested in the last six years in our customers data and in our AI capabilities, particularly machine learning, knowledge engineering and, of course, now GenAI to really take the customers’ data and do their marketing campaign for them, help manage their cash flow, create invoices, send invoices on their behalf, follow up with customers, make sure they get paid. That’s what we mean by it’s done for you. And the customer can always tweak and let us know what things they want done differently.

Over time, Intuit should be able to monetise this.

Consumer

The consumer segment includes the tax preparation business, TurboTax and Credit Karma, a broad based consumer credit product. The TurboTax business represents 26% of group revenue and Credit Karma 12%.

TurboTax

TurboTax software was first developed by another company, Chipsoft in 1984. In 1993, Intuit acquired Chipsoft for a deal valued at $225m or 39% of the merged company - a huge transaction at the time.

Since then, TurboTax has been the market leader in tax preparation and evolved from selling disks in boxes across retail stores to online filing.

As TurboTax grew, a persistent overhang was the possibility that the US government would create its own tax system, similar to other developed markets. Over the years, there were multiple proposals for the IRS to offer a simple, no-frills solution for low-value taxpayers.

To mitigate this risk, TurboTax organised a group of the leading tax preparation providers under the Free File Alliance, and thereby agreed with the IRS to provide free federal filing to around 60% of taxpayers. TurboTax started offering free tax preparation for low-income filers in 1999. In return, the IRS would not develop its own system.

The initiative has come under fire as it never really gained meaningful traction. The players under the Free File Alliance were not incentivised to advertise the free products. Many filers who began in the Free Edition would later need to upgrade to a paid edition in order to file.

Over the years, various government officials have spoken out against the tax prep industry. Barack Obama once promised the IRS would develop its own system:

This means no more worry, no more waste of time, no more extra expense for a tax preparer

TurboTax has also come under scrutiny from the US Federal Trade Commission (FTC) as well as investigative journalist website ProPublica:

What is clear is that Intuit’s business relies on keeping the use of Free File low. The company has repeatedly declined to say how many of its paying customers are eligible for the program, which is currently open to anyone who makes under $66,000. But based on publicly available data and statements by Intuit executives, ProPublica estimates that roughly 15 million paying TurboTax customers could have filed for free if they found Free File. That represents more than $1.5 billion in estimated revenue, or more than half the total that TurboTax generates.

Management has confirmed it has served over 100m customers for free on TurboTax.

US Tax System

In most developed markets, the government operates its own tax software for consumers to file annual returns.

This is not the case in the US. Why?

The tax system is comprehensive and complicated. According to many scholars, experts and ordinary taxpayers, the tax system is unreasonably too complex.

Taxes are collected by the federal government, states and municipal governments. It includes income, payroll, property, sales, capital gains, dividends, estates, gifts and different fees and tariffs. Taxpayers need to submit federal and other state taxes.

The complexity is highlighting in a 2016 Forbes Article:

Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. To put that in context, that works out to 222,500,000 full work weeks (assuming a standard 40 hour work week). You’d have to work 4,278,846 years straight to hit those kinds of numbers.

Another barometer for complexity is how long the American tax code is.. more than 70,000 pages.

Tax rules are constantly changing with new policies, credits, exemptions or applicable deductions. Filing often requires multiple, complex forms to minimise taxes. The tax system also treats different sources of income in different ways and requires specific forms and calculations for each. Some parts of the tax code are difficult to explain, even by professionals.

Americans therefore spend a lot of time and money managing their taxes. It creates uncertainty and significant time, which is why the assisted tax category is so integral. Tax code simplification has long been spoken about. But nothing has been done and is unlikely to change anytime soon.

Value Proposition

Taxpayers spend a lot of time and money complying with tax laws. This is where TurboTax fits in - software that automates parts of the process and reduces uncertainty.

For low-income consumers with no real assets or investments, a free IRS tax filing partner works. There are 8 left below.

They can also file for free with TurboTax, where 37% of the population is eligible. On average, TurboTax helps 10m consumers file for free every year.

Then why do DIY filers choose to pay tax prep software providers?

A large portion do not qualify. In addition, TurboTax reduces time and uncertainty:

• Brand - well known and trusted brand that reduces the uncertainty of doing taxes and getting something wrong.

• Efficiencies - an iterative system that incorporates tax reforms and changes, while leveraging historical customer data for greater automation and accuracy in returns.

Using a free or manual alternative is riskier, more time-consuming and prone to errors, often causing taxpayers to miss deductions or credits. TurboTax leverages AI to identify missed opportunities, increasing the accuracy and value of returns.

TurboTax Live

TurboTax is transitioning from a DIY leader to a services-driven model. For years, it dominated DIY tax preparation with ~80% market share, but growth was limited and the risk of disruption was significant.

The company is now moving upstream into the assisted category - combining its leading platform with AI and HI (human intelligence) to improve the process for more complex tax filers.

In simpler terms, TurboTax is partnering with tax agents to offer:

• Assisted: Users complete their own returns with expert guidance

• Full Service: Experts prepare and file returns on behalf of the customer

The value proposition is uncertainty reduction, speed (vs going to a tax agent) and also price. TurboTax automates tasks, end-to-end workflows and entire functions. The tax experts can then provide the last mile or even complete all the work.

This is explained below:

When customers choose us to do their taxes for them, we match them with the best expert on our AI-driven expert platform within seconds and share the experts’ qualifications while automatically uploading the customers’ data, making the first interaction a wow experience. An AI-powered human expert that completes the customer’s return in less than two hours, offering proactive and personalized assistance and providing the opportunity for customers to access their money immediately, all the while on the go or in the comfort of their home.

It is clear the competitive moat around tax preparation is weaker than Accounting Software. But TurboTax’s entry into the Assisted category makes this a better business with broader competitive advantages around:

• Counter-positioning - lower price, technology driven, fast and simple alternative to the cumbersome process of filing with a tax agent.

• Process Power - streamlined data transfer between human experts and tax filers leads to time saved understanding and processing taxes. There is far more information asymmetry seen across in-person tax scenarios.

Data is the big advantage - with years of historical information from TurboTax, Credit Karma and Mailchimp. The comprehensive view of consumers is used to automate and predict large parts of the tax prep process. Tax experts can focus on higher value tasks and save considerable time - rather than completing mundane tasks.

The platform competes with hundreds of thousands of independent businesses who have very manual and high priced services. Each year, ~13% of the market searches for alternatives, dissatisfied with their prior-year experience. While the majority of the 43m Credit Karma users are actually using the assisted tax method. The opportunity is significant to win more customers, and shift the business to one that is stickier and higher value.

TurboTax Live has been a work in progress - with management continuously learning and refining its offering. This year iterations around more local experts, year round advertising and transparent pricing led to TurboTax Live revenue growing 47%. The CEO of Consumer Mark Notarainni notes:

The biggest reason they switch is pricing. And so, our campaign was all about beating price, which we know we already do naturally, but we needed to raise heads, intercept those customers when they’re making that decision, let them know we have services, and we can do it at a very competitive price point with a much better experience.

Pricing

TurboTax is considered the gold standard and premium proposition for tax prep. There are four tiers for DIY customers; Free Edition, Deluxe, Premier and Self-Employed. Approximate pricing among peers can be seen below for federal tax files.

TurboTax is the most expensive. While FreeTaxUSA is free for federal files. Each provider charges for state returns as well; TurboTax $64 vs H&R Block $49 vs FreeTaxUSA $15.

TurboTax offers its own free version, which completes returns for around 10m people annually. FreeTaxUSA and other free tax prep providers drive healthy competition in this space.

TurboTax has seen more churn across the highly price sensitive filer. There is a fair bit of competition in this space.

Intuit has explained:

What we are not focused on are the simple filers that have a higher propensity to change platforms year after year, because we frankly don’t think that’s a good return on our investments and there’s not opportunity for us to grow and earn revenue there.

For DIY filers with more complex tax returns, TurboTax differentiates via automation and its integration with Credit Karma that saves time and reduces errors.

In the Assisted category, TurboTax has lower prices than peers.

The Full-Service offering, where the tax pro does the return for you, can go from $349. See below.

H&R Block advertises a starting price of $99 but is less transparent on what pricing can get to. The company’s ARPC in the Assisted category is $260-270 vs TurboTax Live at $224. An independent tax accountant can charge anywhere from $250 and beyond $1,000.

Importantly, there is far greater price transparency when using TurboTax, which provides a free estimate and a maximum price on enquiry. Peers tend to disclose pricing when you are ready to do your returns and can charge multiple add-ons after the process is complete.

TurboTax DIY ARPC is around $60 and assisted tax ARPC is closer to $250. The company is also entering the business tax space which has an APRC around $850-$1,000.

Industry

The tax prep industry is quite stable. Every year, consumers and businesses need to file a tax return. Total filers grow on average with population growth and rising wealth usually drives more complex returns over time.

TurboTax is the market leader with around 60% share of DIY returns and 27% share of total returns. The company has gradually lost filers to cheaper alternatives while there was a lift during COVID due to government grants. H&R Block has seen similar trends.

As discussed, the strategic focus has been to acquire higher value customers. This has seen dollar share of tax market grow from 11% in 2017 to 18% today.

The opportunity is to gain share in the Assisted category which represents 54% of total return files but 81% of the dollar share.

CFO Sandeep Aujla explains it well:

When you step back and look at the tax addressable market, it’s about a $35 billion market. The do-it-yourself tax category is about $4.5 billion. And we make $4-plus-billion in our TurboTax business, which is largely DIY, right? So that gives you a limited runway there. So where’s the opportunity? The opportunity is in assisted tax, which is a $20 billion, $21 billion thereabouts market with 87 million filers, and 13% of that market comes up for add-back every year.

Business taxes represent another $10b opportunity, where TurboTax’s value proposition is similar to the consumer assisted category. TurboTax again has the advantage of owning the data and platform to streamline large portions of the process.

Competition

In the DIY segment, TurboTax competes against H&R Block, TaxAct and a range of cheaper (almost free) software providers such as FreeTaxUSA. The combined share of DIY tax filers between H&R Block and TurboTax is around 70%.

As discussed, TurboTax differentiates with data and AI. Its partnership with Credit Karma drives a range of benefits including:

• Pre-filled information

• Special offers and pricing for Credit Karma members

• Tax filing via a Credit Karma application

• Immediate refunds rather than waiting weeks

The rationale is to make the process fast and get refunds in the hands of consumers quickly (most Americans live paycheck to paycheck). It is harder to grow here given the price sensitive consumer.

In the Assisted category, the market is quite fragmented with the option to use hundreds of thousands of individual tax accountants.

The largest other peer is H&R Block who has 13% of assisted filers and 11% share of revenue. Revenue growth has gradually improved.

Similar to TurboTax, H&R Block has a leading brand and long presence in the market providing trust and greater certainty. The issue lies in its technology capabilities and ability to compete in a data and AI world.

The other tax prep software providers have offerings in the assisted category. The combined share of revenue for TurboTax and H&R Block is around 20%. Most of the remaining revenue share is driven by independent tax accountants.

TurboTax has also entered the Business Tax segment - attempting to replicate its value proposition for individual consumers. This is still early days.

The competitive dynamics are favourable in the assisted category, with only one other scaled peer and a highly fragmented market dominated by independent tax accountants. Competitive intensity is low.

Why can they win?

In the DIY category, price is an important factor and is a reason why they have lost a bunch of lower end filers. The aim is to retain dollar share via its leading brand and easy to use software with increasing automation. The company is bringing more done for you experiences.

There are two ways TurboTax can win more Assisted customers.

One is to transition existing customers as they progress up the complexity ladder. Ie an initial free customer who used to do a simple tax return now has dependants or is buying their first property.

The other way is to gain share. Intuit notes:

Today, the assisted tax preparation process is plagued with inefficiencies for tax filers and tax preparers alike leading to more than 10 million assisted tax filers switching tax preparers each year. Working with a tax preparer can be time-consuming, manual, and expensive, with little price transparency, and many filers put up with these pain points because they don’t know there is a new gold standard — a fast, effortless, affordable way to get taxes done.

The industry is opaque, slow and costly. Intuit is changing this with a blend of AI and humans. The company through its Full Service/ Assisted experiences offers:

• Convenience - Easy to use platform with effortless data import and transfer

• Availability - 12k tax specialists available 7 days a week from 5am to 9pm during tax season

• Better returns - AI driven solutions can identify deductions and credits even missed by tax agents

• Certainty - Guaranteed calculations to ensure no IRS penalties and a Tax Return Lifetime Guarantee

• Speed - the ability to get a refund done by a qualified expert in 2 hours

• Transparency - can talk to a tax expert to understand pricing and receive a proposal

TurboTax provides significant uncertainty reduction, price transparency and a range of other benefits. Intuit is marketing throughout the year to be top of mind with targeted SEO search for assisted filers. I think the segment can grow above the targeted 15-20% range.

Financial profile

The underlying mix-shift to higher value assisted revenue is making this a better business. TurboTax Live has grown from 10% of revenue in FY19 to 41% of revenue in FY25.

While DIY and other revenue has stagnated.

I expect this mix-shift to continue with TurboTax Live to represent >60% of revenue by the end of the decade.

The shift to services raises questions about margins, as TurboTax needs to remunerate the tax and bookkeeping experts that support the Live offerings. Segment operating margins have declined slightly from 81% to 78% over the last 3 years.

The business is managed at a group level while automation and further scale should offset further dilution from its expert platform.

Generative AI

The question is, can LLMs automate the whole tax process. Could an AI model do your tax return?

Maybe but it will not be free. And it may be riddled with errors.

The most important thing is, it needs your data. Without the data, how can an LLM or AI agent perform the complete task. It needs to understand what your expenses, deduction and credits were for the year.

In addition, the tax system is highly complex. It isn’t always going to be a straight forward yes or no answer. There needs to be some sort of judgement involved.

While AI models are great, they do hallucinate and are prone to errors. For 100% accuracy, AI for now, needs to be augmented with humans.

This is exactly what TurboTax does. The company has the advantage of operating a leading cloud-first platform, having extensive data from Credit Karma and TurboTax (25+ years of historical data) and a balance sheet with significant capability to reinvest.

TurboTax is well positioned to be the ones that improves the process and solve the pain points currently experienced by users.

The barriers for an AI native tax prep company are:

• Breadth and depth of data

• Scale of investments

• Human assisted tax preparers

AI should actually enhance TurboTax’s proposition and enable them to differentiate on both the low and high end filers.

Credit Karma

Intuit acquired Credit Karma in December 2020 for $7.1b in a 47% cash/ 53% equity transaction. The company paid a 7x revenue multiple. Many questioned the acquisition price, anti-trust and the dilution to margins and earnings.

The strategic rationale was in owning more data and creating a personalised financial assistant that enables consumers to take greater control of their financial lives. There were also many synergies to be gained between Credit Karma and Intuit.

Intuit explained this below:

Our consumer financial platform coupled with data and AI will help our Credit Karma members make ends meet, pay down debt, improve their credit score, find the financial products right for them – and come tax time, we are leveraging the unmatched power of TurboTax to create a seamless tax filing experience from start to finish, making doing their taxes easier than ever before.

The importance of data should not be understated.

Credit Karma has the largest and most engaged member base in consumer digital finance with 43m monthly active users and 149m members. Experian seems to have around 70m members.

How does it work?

Credit Karma is an app for anyone in the US looking to understand their credit rating and find the right financial products for their needs.

The platform works with a variety of partners including credit bureaus, banks, credit card issuers, insurance carriers and other financial institutions and lending partners. They provide data and offer a variety of products. It has other features around driving and voice.

The company has almost 20 years of historical delivering breadth and depth of data.

For the consumer, the app is free. Credit Karma makes money from the delivery of qualified links that result in completed actions or cost-per-action transactions. Credit Karma also generates revenue from some cost-per-click and cost-per-lead transactions.

To put more simply, revenue comes from:

• The number of members

• How engaged the members are

• Translating into the number of qualified links/ transactions

Engagement is important to drive more clicks and enquiries. While personalisation and understanding consumer needs increases the relevant links.

Since the acquisition, monthly active users (MAUs) have gradually risen, while average revenue per MAU has driven most of the revenue growth. This points to greater engagement, better offers and an improving credit cycle.

Is it a lower quality business?

The revenue quality is lower given qualified transactions can be variable as they are subject to credit cycles and approvals from credit cards, loans and personal insurance.

Credit Karma’s revenue did stall after acquisition, caused by the significant volatility in the ramp in interest rates and inflation that saw financial institutions cut back on lending approvals. This was the case across personal loans, mortgages and auto insurance.

There are some resilient parts of the business. In times of economic weakness, Credit Karma can see more engagement as users seek financial advice. While insurance policies tend to stay quite resilient.

MAUs have been quite stable reflecting an engaged audience. Revenue has been less predictable and was downgraded in FY23.

Overall, Credit Karma does not have the same predictability as the other businesses. But the strategic importance is significant, providing data that fuels the other segments.

How does Credit Karma win?

For consumers, Credit Karma provides free credit scores from Equifax and TransUnion, ways to improve this and to view their finances more broadly.

The vast data across its consumer base allows the platform to provide personalised offers through its Lightbox technology from a range of financial institutions. This drives greater certainty for consumers and reduces time spent filling out unsuccessful applications. Approval rates are north of 95%.

Head of Consumer Mark Notarainni notes:

But now within Credit Karma, we can say, hey, based on your information, have you thought about refinancing? Have you thought about taking out an extra credit card? Because you see, you’ve done X, Y and Z. And so, there’s just a really great opportunity in that ecosystem now to become a permanent part and a habitual part of the consumer financial journey, not just once a year in taxes, and not just doing credit and credit cards and Credit Karma, but actually being about managing their money more efficiently.

In relation to lenders, Credit Karma can help them find qualified borrowers who have a high likelihood of getting approved by identifying those that meet certain underwriting criteria. For lenders, this removes the cost and time needed to perform its own due diligence. Conversions from Lightbox increased by 43% in FY25, an important driver of growth.

A notable portion of the current user base is also in the non-prime segment - those who have a credit score lower than 660. The opportunity for Credit Karma is to grow Prime consumers:

But the key here is, off-platform, 39% of originations happen in the Prime segment. On Credit Karma today, it’s about 15%. What’s important about that is there’s a lot of headroom. But if you also understand the market, you also realize that Prime members and Prime products generate roughly 75% more revenue.

Prime customers generate the majority of market revenue. They have distinct needs, with greater exposure to insurance rather than credit. The company is expanding its offerings across insurance verticals to better serve this segment.

Integration with TurboTax delivers additional benefits, including faster tax refunds, higher credit scores and card offerings, which in turn increases engagement and stickiness.

Revenue Profile

Credit Karma generates $2.3b in revenue, which is a significant improvement since the acquisition. Execution has improved while the integration of both cultures has been positive.

Management has tempered their expectation for Credit Karma growth from 20%-25% to a more sustainable 10%-15% growth rate. Growth comes from scaling core and new verticals, moving into the Prime segment and delivering more integrated experiences with TurboTax.

Given the less predictable nature of the business, I have Credit Karma growing at the bottom end of guidance - just above 10%. Combined with high-single digit TurboTax growth, this leads to the Consumer segment growing around close to 10%.

Group Financials

The financial profile of the business is world class.

Revenue is largely subscription based and highly recurring with customer retention rates around 80%. Revenue is becoming higher quality as the business shifts to mid-market and assisted customers. There is inherent pricing power to offset inflation. My forecast is for group revenue to grow at 13-14%, similar to historical trends. There are inherent mix-shifts within the revenue base that drives this persistence.

Gross margins are 80% and lower than peers such as Xero and Sage (90%) and leading software names such as Adobe and AutoDesk.

The reasons for this includes:

• Credit Karma has lower margins

• Live offerings that use human experts and services such as payroll and payments are also lower margin

• There are costs to operate both a desktop and cloud business

Gross margins have fallen due to the above, but improved modestly in recent years. The company is offsetting the above headwinds with the benefits of scale and automation.

Key to driving revenue growth is reinvestment. The company spends:

• $5b in S&M or 27% of revenue

• $3b in R&D or 16% of revenue

• $1.6b in G&A or 9% of revenue

This is a really clean number with minimal capitalisation of R&D. It means costs are mostly expensed and reduces near-term profitability. While other technology companies may capitalise and amortise these costs over an extended period, boosting reported profitability.

Furthermore, a large portion of investments are not made to stay in business, rather to grow the future revenue and moat. This is part of the reason why QuickBooks and TurboTax have remained the dominant leaders in their respective industries. There is inherent operating leverage with the ability to flex its cost base up and down if needed.

See below operating profits and margins. Note that my numbers are adjusted, they remove non-core expenses such as amortisation of intangibles but it includes stock-based compensation.

SBC as a percentage of revenue is expected to reduce over the coming years.

Assuming a tax rate of 22%, I get an adjusted EPS of $15.2 in FY25, which has consistently grown. The dip in FY22 came from the acquisition of Mailchimp and subsequent equity dilution. My expectation is for EPS to grow at high-teens.

In terms of capital allocation, the dividend payout ratio is around 30% with the rest predominantly in stock buybacks. Capex is negligible. M&A has been strategic with management willing to make big bets if needed - the Mailchimp acquisition and dilution of shareholders was poor. The previous CFO has since left the business.

Otherwise, capital allocation has been reasonable.

Management and culture

Intuit is a 40 year old company that has overcome multiple threats. Why?

It comes down to a culture of innovation and long-term management decisions.

The company could have stayed a desktop company and reaped profits for a few more years. But it made the tough decision to accelerate the shift to the cloud, which saw revenue and profits decrease in 2015. This bold decision highlights the willingness to change and face disruption.

The current management team are highly aligned. They are experienced and capable, having transformed the business since 2019. Management have all been internal hires and have been with the business for multiple years.

Incentives are highly performance based (97% variable for CEO) with goals around operating profit growth and total shareholder returns. I have reservations on whether long-term incentives should be aligned to TSR.

Founder Scott Cook continues to serve as a director and is involved as an innovation officer in the business. He remains a significant equity owner with 6.6m shares or 2.4% of the company.

Risks

There are multiple risks to think about especially given the scale of the business. A question I ask is - why could this business blow up in 5 years? Other than a recession, I think the main risks are:

• Generative AI - explained more broadly above. Generative AI and AI agents are disrupting various industries. The software industry is particularly susceptible. Intuit has been preparing for this for years, having refreshed its platform, moved customers to the cloud and subscription revenue, acquired core data assets and grown R&D to deliver AI. New players could emerge with AI agents that could make the current process cheaper and more efficient. Intuit needs to continue innovating to ensure that its value outweighs its higher relative prices.

• Accountant channel - the increased use of AI agents and assisted tax offerings could risk isolating its key partners, the accountants. By automating more customer processes and even going direct in some cases, it means that some customers will rely less on accountants. Some accountants will flourish and have more time to focus on value added work. Others may take this negatively and push fewer referrals to Intuit. The company needs to ensure it does not lose the accountant base.

• Loss of lower value subscribers - Intuit is trying to move upmarket. The risk is they lose lower value customers who tend to prefer simpler, more intuitive offerings - this has already happened to Mailchimp. Competitors such as Xero are focusing more on smaller businesses while platforms such as FreeTaxUSA are gaining presence in the lower value space. Execution is key here.

• IRS Tax Platform - the IRS could create its own free tax platform, potentially handling returns for simpler filers. In the past, the complexity of the tax code and associated costs acted as a deterrent. TurboTax and other various free offerings already exist today. The risk is lower today given the growth in TurboTax Live revenue and recent government cost cutting measures.

• Credit Karma/ Mailchimp - these new businesses have already had bumps along the way. They have been less predictable and could impact group growth going forward.

Predictability

Intuit has a highly predictable business across both accounting software and tax segments. There is high customer retention, favourable industry dynamics while products are mission critical.

As a result, both segments have delivered consistent year-on-year revenue growth since FY09, with the only notable dip in Business in FY15 due to the aggressive migration of customers to the cloud.

Intuit grew both segments even during the 2008 global financial crisis. Operating income has similarly been resilient, declining only once since 2000 (in 2015). Free cash flow conversion averages ~100%. This highlights the resilient, highly predictable nature of the business.

Valuation

Based off my adjusted numbers (taking out non-core expenses but including SBC), Intuit trades on forward adjusted P/E of 34x growing EPS at high-teens. As an aside, P/E excluding SBC is 27x.

Relative to its 10-year historical averages across P/E and P/FCF, valuation looks reasonable. Note, these are non-GAAP numbers.

Intuit trades on the low end of its 10-year range. Note, the business was much lower quality in 2015, but there was also minimal SBC.

The company trades favourably against other peers, apart from Adobe and Salesforce. The multiples for these companies have been significantly impacted by AI fears. See below, using Factset non-GAAP numbers.

If you take out SBC, it trades at a slight premium to the hyperscalers from a P/E perspective, growing earnings at a slower pace, but with better free cash flow. Overall, the multiples approach points to a reasonable valuation.

I take a two step approach to figure out what I would pay for this business. First is using a DCF. Forecasting 10 years of FCF per share and taking out SBC and leases. Then considering the AI risks, using a terminal FCF multiple of 17x and discount rate of 10%.

This delivers a target price of $736.

Then using a multiples approach:

• Get the forward EPS 3 years out

• Apply a reasonable multiple I would pay at year 3 - I use 30x (right now 34x).

• Add dividends

• Apply discount rate of 10%

This returns a target price of $695.

Take the average of the two which is $715 and discount another 10% to provide some further margin of safety to return $644. At or about today’s share price. I think this business can deliver low-teens returns from here.

The valuation banks on the persistence and sustainability of earnings. Intuit is a highly predictable business with a long runway. Importantly, it is becoming a better business with higher value revenue streams and higher quality earnings. I think the valuation is reasonable and you are getting a fair price today. My analysis assumes the multiple falls slightly over time. It is not cheap and would be my highest valued business.

The alternative is to wait for some form of economic weakness and reduced business sentiment. I would have a small position here and purchase more if given the opportunity in the future.

Summary

In summary, Intuit is a high-quality, long-term compounder for the below reasons:

• Market Leader in two attractive industries with dominant positions

• Superior product with significant pricing power

• Consolidated markets with rational competitors

• Long runway to reinvest capital at high returns

• Strong management team focused on innovation and customer outcomes

• Solid balance sheet with limited debt

• Diversified business model across customers and segments

• Improving financials with high incremental ROIC and margins

There is a pretty high degree of confidence the business will be larger in 5 years time. It trades on a reasonable valuation. Looks good to me.