Keith Weiss, who is an analyst for Morgan Stanley, initiated an “underweight” rating on Intuit (NASDAQ:INTU) stock in late 2016. But this week, he changed his tune. Not only has he upgraded INTU stock to “equal-weight,” but he put a $225 price target on it.
OK, this still represents less than 1% upside from the current value! But then again, his prior target — which was at $172 — really had to be updated.
According to Weiss, he believes that INTU stock should benefit from growth in QuickBooks and TurboTax, which should remain in the growth phase for some. He points also out the company’s strong competitive advantages and the ongoing innovations in the product lines.
While all this is true, I think Weiss should be much more bullish on Intuit stock. The company represents a compelling play on the fintech market. In fact, for a recent post for InvestorPlace.com, I included Intuit stock as one of my five top picks in the category. Some of the others include PayPal (NASDAQ:PYPL), Envestnet (NYSE:ENV) and LendingTree (NASDAQ:TREE).
So here’s a look at Inuit stock:
Intuit Stock: Franchise Power
Much of the revenues for Intuit come from TurboTax and QuickBooks. Keep in mind that the company has been the dominant player in each of these categories for more than two decades.
A key has been an obsessive focus on the customer, which has led to ongoing innovations. For example, in the case of QuickBooks, one of the recent features is one-day payments. There has also been the launch of an advanced version that is geared to the midmarket.
Next, the TurboTax business (this also includes the Mint personal finance offering) remains a major cash cow. In fiscal 2018, the revenues from this segment came to $2.52 billion and the operating income was $1.596 billion. This is the kind of margin — at 63% — you’d see with a monopoly!
Yet TurboTax continues to show steady improvements. Perhaps the most notable example of this is TurboTax Live, which is a service that has CPAs and Enrolled Agents review tax returns. The result has been a 19% increase in tax filer confidence.
Data, AI and INTU
A valuable asset for INTU is its enormous data set. And yes, the company has been finding ways to leverage this. Look at TurboTax. Over the years, the company has gained consent from 25 million users to use their data to get offers for better rates and loans, which has meant a 9X conversion rate for partners.
QuickBooks has been effective as well. A good example is the move into providing loans to small businesses. Because of improved underwriting capabilities — especially with access to company books — 60% of loan approvals would be considered “un-lendable” by traditional financial institutions. Yet the loss rate is half the industry average. Oh, and 39% of customers apply for a second loan.
Finally, INTU has made strides with AI, as seen with QB Assistant. While still in the early phases, it has already processed over 1.5 million questions.
Intuit Stock: Market Opportunity
Even though Intuit was founded back in 1983, the company still has much room left for growth. It certainly helps that the company has found ways to extend its platforms, such as with its Self-Employed app. It targets the fast-growing market for the so-called gig economy.
In Intuit’s existing market segments, the company has 42 million consumer customers. But the company estimates the opportunity is at a whopping 175 million. As for small business and self-employed category, INTU’s base is close to 7 million. Yet the opportunity is roughly 215 million. And looking at the potential spending of both segments, it comes to about $33 billion. By comparison, the annual revenues for INTU are about $6 billion.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.