Tickers in this Article: INTU, HRB, ADP, PAYX, ORCL, SAP, EBAY
Maybe Intuit (Nasdaq:INTU) is a good microcosm for the market and the economy. Business conditions are better, but not great, and that is especially true in the small business category. The market, though, has rewarded the rebound handsomely and so while the stock has been a very strong performer, it is now at a point where valuation, quality and future prospects seem balanced. In other words, the market has certainty caught up to the economy and it looks like there could be more risk than reward if valuations go much further.

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Intuit's Third Quarter Wasn't Taxing
Intuit delivered respectable fiscal third-quarter results, largely on the back of a solid performance in the consumer tax business (the TurboTax franchise). Total revenue rose 15% in the period, fueled in large part by the 18% growth in consumer tax preparation. The company saw an 11% increase in TurboTax units through tax season, even though H&R Block (NYSE:HRB) held up a lot better than some had expected. Interestingly, for as much talk as there is about Intuit's opportunities in areas like software-as-a-service and mobile apps, the consumer tax business is still about one-third of the company's full-year revenue base.

Outside of consumer tax, business was just OK. The Small Business unit saw revenue up 13% on the whole, even though unit sales of QuickBooks were down about 8%. Mobile subscriptions are growing nicely, though, and the company is seeing above-average growth in businesses like payment solutions.

Intuit was able to leverage solid profit growth from this revenue performance. Gross margin improved about 70 basis points (and stands at an almost unbelievable 90.9%), and operating income increased 19%, whether GAAP or non-GAAP accounting is used. Stock option expense rose basically in tandem with revenue, but Intuit did need to spend more sales and marketing dollars to drive consumer tax revenue growth.


Where To Next?
Intuit has built a great business catering to small business owners. Now it is time to see which of the many roads to future growth management decides to take. Right now, the U.S. is an overwhelming part of Intuit's business. Will the company try to penetrate other English-language markets (perhaps challenging Sage (OTC:SGPYY) in Europe) and look to foreign expansion as a growth driver?

What about deeper penetration with its existing base? Less than half of Intuit's QuickBooks users use the company's payroll and payment services. That sounds like a chance to go down the trail blazed profitably by Automatic Data Processing (Nasdaq:ADP) and Paychex (Nasdaq:PAYX), as well as tap into some of Wells Fargo (NYSE:WFC) and US Bancorp's (NYSE:USB) lucrative non-banking service business.

Of course, there is also the market for mobile computing applications, software-as-a-service and social networking. To some extent, though, Intuit's efforts here may be as much about holding its business as growing it. The cloud computing model arguably would open up Intuit's core customer base to rivals like Oracle (Nasdaq:ORCL) and SAP (NYSE:SAP) - companies that may not normally want such small customers, but could leverage them through a software-as-a-service model. Likewise, who knows if or when companies like Google (Nasdaq:GOOG) or eBay (Nasdaq:EBAY) may turn their eyes toward more accounting and financial services offerings to the small business community.

The Bottom Line
Intuit is no pushover and the company has a very good chance of continuing to grow within its market. That said, Intuit's stock has already rebounded even though the underlying economic conditions in the small business world are not quite as strong yet. Intuit is a fine idea at the right price, but today's price seems to already assume most of the company's likely success in the coming years and there are cheaper ideas to be found.

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