Intuit (NASDAQ:INTU) stock has gained 18% so far in 2020, and closed Monday at an all-time high. There are two ways to look at that trading.
The first is with quite a bit of skepticism. An 18% move in a touch over six months is reasonably large. Intuit stock in fact has added about $12 billion in market value so far this year.
Meanwhile, there should be pressure on the business in the near-term, and potentially longer. Small businesses comprise a key customer base for Intuit. Some of those businesses sadly have closed, and more may follow. In that context, it’s difficult to see how Intuit is better-positioned than it was at the beginning of January — yet its stock has rallied significantly.
The alternative view is precisely the opposite: that 18% isn’t quite enough. Across the market, stocks like INTU are being rewarded by investors. Many have rallied much faster and much further. And on a relative basis, the seemingly steep valuation assigned Intuit stock looks at worst reasonable and at best cheap.
Forced to choose, I’d lean toward the first viewpoint. But I’ll grant that many investors might see it very differently, and at least of late, those investors generally have been right.
The Case for INTU Stock
After an 8% rally over the past week, Intuit stock now has recaptured all of the losses it faced during the February-March sell-off. Again, some investors might view the quick rebound with some skepticism. But looking around the market, INTU actually has underperformed.
Relative to February highs, INTU now is up about 1%. Other online and/or digital financial and payments plays have done much, much better.
Square (NYSE:SQ), for instance, is up 90% year-to-date, and trades about 40% above where it did at February highs. PayPal Holdings (NASDAQ:PYPL) has posted a similar rally since February, with a 63% bounce YTD. Shopify (NYSE:SHOP) has more than doubled.
To be sure, the INTU story is different from those of these peers. INTU shouldn’t necessarily be posting the same gains. Still, across the market, online-only businesses are rallying sharply. Investors are hugely bullish on the digital economy.
Admittedly, tax-focused rivals aren’t doing nearly as well. Neither Blucora (NASDAQ:BCOR), which owns TaxAct, nor H&R Block (NYSE:HRB) have rallied all that far off their lows. But it’s possible Intuit can take more market share, particularly from H&R Block and private equity-owned Jackson Hewitt. And the QuickBooks business similarly could benefit from the same digital shift that is boosting so many tech plays.
In short, investors who see more upside in high-growth tech names should at least be taking a long look at INTU right now.
The Case for Caution
One problem with that case, however, is that it only works if the rally in the rest of tech is going to last. And there is no shortage of skeptics on that front. The valuations assigned the likes of SQ and SHOP, in particular, look particularly aggressive.
INTU, too, isn’t cheap, at 38x next year’s consensus earnings per share estimate. And it shares a common risk with Square and Shopify: a significant reliance on small businesses.
That risk manifested itself in Intuit’s third quarter report. Tax revenue unsurprisingly was pressured by an extended Internal Revenue Service deadline. But in the Small Business and Self-Employed Group, growth basically came to a halt in the second half of the quarter.
QuickBooks online customer acquisition decelerated, and churn increased. Online payment volume growth dropped to zero. The number of workers paid via Intuit’s online payroll platform declined.
That pressure is likely to last for some time, in some form. Small businesses are going to have a long, hard slog going forward. And it’s difficult to reconcile what could be years of pressure on a segment that drives over 40% of profit with a stock price at all-time highs.
Choose Your Side
Of course, the argument over Intuit stock echoes that over the market more broadly. The tech-heavy NASDAQ Composite is at all-time highs amid double-digit unemployment. To many investors, that is a contradiction that is bound to end.
I personally don’t believe it’s quite that simple. This pandemic will accelerate significant trends in tech. Larger companies are going to be able to take market share from smaller firms who will struggle with short-term pressures. And investors, correctly or not, are at least taking the long view, and not selling quality companies simply because of a couple of quarters, or even a couple of years, of profit pressure.
That said, it’s fair to wonder if that case suggests that the NASDAQ should be higher year-to-date. The same is true for Intuit stock. The news seems worse. The stock price is higher. Either that’s a sign of a market accurately forecasting better times ahead — or a stock that’s gotten ahead of itself.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.