Tickers in this Article: INTU, HRB, CRM, ORCL, GOOG, MSFT, PAYX, VMW
Intuit (Nasdaq:INTU) is still likely best known for its tax software and the various small to medium-sized business software packages (like QuickBooks) that it offers. What is not so well-known, though, is that Intuit is actually a large software as a service (SaaS) provider, and a growing player in markets like payroll, payment solutions and bank infrastructure. While Intuit likely suffers a bit from "neither fish nor fowl syndrome," and less impressive growth than cloud computing titans like Salesforce.com (NYSE:CRM) and VMware (NYSE:VMW), this is a surprisingly complicated yet high-return company.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Decent Results in a Slow First Quarter
For better or worse, Intuit is still at a point in its life cycle where seasonality matters. To that end, this fiscal first quarter, a quarter in which there is little demand for tax software, is a fairly sleepy one. Nevertheless, reported revenue rose 12%, and the company posted a 13% growth in its small business segment, as subscriber growth for products like QuickBooks Online, QuickBooks Enterprise Solutions and online payroll was all quite good.

Profitability was better, but not exactly exciting. Gross margin did improve about a point from last year, and the company did shrink its operating loss. Unlike many emerging software names like Salesforce.com, SuccessFactors (NYSE:SFSF) and Taleo (Nasdaq:TLEO), Intuit does not have to commit the same sort of financial resources to marketing to drive sales growth. By the same token, though, that sales growth is a lot less at Intuit.

Tax Season Will Be Interesting
With the Department of Justice blocking H&R Block's (NYSE:HRB) acquisition of TaxAct, this will be a more interesting selling season for tax software and services. Intuit is still far and away the leader, though more so in the physical software market than the online game. While TaxAct always has been an aggressive competitor, it will be interesting to see how H&R Block responds, as the company really needed this deal to revive its software and online efforts. (First time filing your taxes? Read Filing Your First Tax Return.)

Underappreciated Cloud Player
There is clearly a lot of hoopla surrounding cloud services for businesses. Investors pay keen attention to what large companies like Microsoft (Nasdaq:MSFT), Oracle (Nasdaq:ORCL), Amazon (Nasdaq:AMZN) and Google (Nasdaq:GOOG) plan to do, while awarding robust valuations to players like Salesforce.com.

Yet, by many measures, Intuit is already one of the largest cloud players out there. Intuit offers a variety of SaaS products like QuickBooks Online, Mint.com and online payroll services, and has done quite well in signing up users - QuickBooks Online added 40% more subscribers from last year, for instance. This leads to an interesting question, though, as Intuit clearly does not have the same cloud-based revenue as many of the more exciting software names - does Intuit have a lot of leverage for future revenue growth, or is there less monetary opportunity in bringing SaaS to small businesses than some analysts believe?

Don't Sleep on the Growth Opportunities
Apart from getting more small to medium-sized business customers using (and paying for) cloud offerings; Intuit has other growth irons in the fire. Intuit isn't big enough in payroll, yet, to be a serious threat to Automatic Data Processing (Nasdaq:ADP) or Paychex (Nasdaq:PAYX), but a 3% customer growth and a 20% online customer growth should not be ignored.

Likewise, Intuit has a ways left to go to seriously threaten or dislodge companies like Fiserv (Nasdaq:FISV), Global Payments (NYSE:GPN) or Heartland Payment (NYSE:HPY), but the company seems serious about exploiting this opportunity.

The Bottom Line
Perhaps one of the biggest challenges for Intuit is fully exploiting all of these growth opportunities without overextending itself. Perhaps, more to the point, Wall Street's valuation on the shares suggests a fair bit of skepticism that Intuit will ever evolve much beyond its tax and small business software; if the Street took its potential in SaaS, payment services or payroll services more seriously, the valuation would be hard to explain.

Intuit's valuation seems to take a lot of risk out of this name. The biggest risk may actually be that the company plays too conservative; under-spending on marketing to preserve margins and cash flow, and allowing more aggressive rivals to stake large claims. Though Intuit is unlikely to be the most exciting software stock out there, this could be a reasonable idea for investors scared of the valuations in other software names.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen. D. Simpson, CFA did not own shares in any of the companies mentioned in this article.

comments powered by Disqus

Trading Center