TIP835: Intuit (INTU): The S&P 500's Biggest Loser w/ Shawn O’Malley & Kyle Grieve

25:23I'm ready for it. Okay. So rewinding to 1983, there's a guy named Scott Cook. He's a former Procter & Gamble marketing executive. And as the story goes, he's sitting there at dinner one night watching his wife work at the kitchen table, and she's frustrated. She's trying to balance the family checkbook by hand. And Cook, having come from Procter & Gamble, has this very deep instinct for understanding consumer pain points. Procter & Gamble is famous for doing an excellent job of listening to what consumers are saying and creating products that actually address their pain points and even very small ones.

25:59And so he looks at what his wife is doing and her struggles and thinks personal computers are going to become more common in homes. And this is a chore that a computer should be able to do. So he teams up with a Stanford undergrad with a programming background. And together, they build a piece of software to manage personal finances, and they call it Quicken. And they name the parent company Intuit because the whole idea is that using it should be intuitive. It should just make sense to a regular person who is not an accountant. And that is the whole ethos behind TurboTax, Credit Karma, and QuickBooks for small to medium-sized businesses doing bookkeeping, payroll, and a bunch of other stuff.

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29:31With Shopify, nothing stands between your idea and a real business. So go make it one. Start your free trial at shopify.com slash TIP. Start your free trial at shopify.com slash TIP. So I love that the entire company started from watching one person struggle at a kitchen table. That's about as grassroots as it gets for what has now become nearly a$200 billion company at its peak valuation. It does sound a bit woo-woo, but my perception is that this thought process with a focus on things literally being as intuitive as possible and also sort of obsessing over optimizing for customer pain points, like the founder's wife sitting at the kitchen table, struggling with balancing the checkbook.

30:22I think that really has come to define the company's culture. And Cook actually made famous this practice called Follow Me Home, where Intuit would literally ask customers to be able to follow them to their homes or to their offices and just watch them use the software so they could see any real friction points as they arise in real time, rather than trying to guess at what problems people might have. And it does sound a little bit creepy, admittedly, in hindsight, but it's metaphorical, mostly. I'm sure they really have gone to people's offices and homes to observe them using Intuit software.

31:00But to me, I see it as more of a mindset. It's a commitment to not designing some beautifully engineered and wildly complex tax solution, for example, that no one knows how to use, but to instead focus on creating products, people can easily navigate by closely listening to their feedback of what is confusing and what's not confusing and what's helpful and what's not helpful. And so it is sort of very similar to the design ethos at Apple too of things should just work and you shouldn't really have to think about it. Yeah. I mean, it sounds so obvious, but gosh, you know, there's just so many software products I've come across where you look at it and it's like, wow, this seems really, really powerful.

31:42But I'm also going to have to spend like 100 hours trying to learn how to use it to actually get the full use case out of it. So, you know, Canva, for instance, is kind of on the low end of design work. I think it's a really, really good example, though, of this kind of subject of simplicity. If you just need to make a really, really basic graphic, you don't want to have to go out and learn how to use Photoshop. You just want to jump on a Canva. And even someone with no design background, like myself, can actually figure out how to use its tools pretty easily. So before working with TIP, I actually used Canva kind of all the time to help make images for use on Twitter and Substack.

32:19It was super easy. It was super intuitive. And I didn't have to spend really any time trying to figure out how to use it. It was just that easy. But I must admit, I haven't used Canva in years. And once I could use AI to generate images, I was less and less likely to use it over time. So So yeah, there's often this kind of disconnect in the software world between products that engineers build and then what is actually most useful to customers. And the vast majority of users, for example, they don't really need complicated software services to file taxes that know every single line of the tax code to a T.

32:51They just need something that's, well, intuitive, something that's basic and something that's good enough for 95 % of the people out there. I agree with that. And that obsession with watching what customers actually do rather than what they say they do is a thread that runs through the entire company and has for 40 years now. And so Cook actually has this really great line. He says, a brand is no longer what the company tells the consumer it is. It's what consumers tell each other that it is. And yeah, I really like that. And just to continue on with the story here, you can imagine that by the mid-1990s with Quicken winning a lot of users over with their accounting software, this naturally caught the attention of the most powerful software company on earth at the time, Microsoft.

33:39Yeah, it's interesting that when you think that Wall Street runs on Excel spreadsheets, it seems like an opportunity that was clearly missed by Microsoft to turn that advantage into a broader, you know, total available market, building out consumer friendly accounting products. Now, I don't want to get too ahead of the story though here. Well, so in 1994, Microsoft tried to acquire Intuit outright for about$1.5 billion, which was an enormous price at the time. But the deal ultimately was abandoned over antitrust concerns. So what does Microsoft do then? Well, they build a direct competitor called Microsoft Money, and they come after Quicken with the full weight of the Windows operating system behind them.

34:19And evidently, Intuit not only survived, but it won. And one of the expressions internally at the time, which there was some truth to, I believe, was that, quote, Microsoft can't match our depth of consumer empathy. And Microsoft did eventually give up and discontinued Microsoft money after having built a product that was more complex than it needed to be. It had fantastic engineering behind it because Microsoft had the best engineers, but it was not intuitive to the everyday user like Quicken products were. I see what you did there, not as intuitive. It isn't really a one-to-one comparison, but the historical parallel that you're drawing is that this is a company that has already stared down this kind of existential platform threat from literally one of the scariest possible incumbents of its era.

35:10And they actually came out even stronger on the other side. And so, you know, I think that really means that Intuit is kind of a scrappy company and the business has only gotten more robust since this clash with Microsoft, which is something to really keep in mind for those that are prepared to write off Intuit entirely due to this next battle that they're supposedly going to have with AI. It is a good parallel to think through, though. I don't want to lean on it too hard because AI risks are definitely not the same as what they face with Microsoft money, obviously. But I just don't see Intuit as some naive victim either who's never faced disruption risk before and is just sitting there on its laurels, waiting to get taken down by AI.

35:49So I think nearly any compounder that you actually look at, they basically all go through their periods where investors really question whether the business can even stay alive or not. I mean, being challenged by Microsoft, their army of engineers, and their nearly endless funding, they could theoretically pump into a business is a very, very scary thought to me. But it goes to show you that if a business really focuses on delighting its customers, it can take on opponents that it probably shouldn't be able to given the gap in resources, which is exactly what Intuit did back then. But let's get exactly from how they got to Quicken, a personal finance tool, to the two huge franchises that we've mentioned here in QuickBooks for small businesses and then TurboTax?

36:28I'm going to probably start to sound like a broken record here, but with Intuit, everything truly comes back to watching customer behavior. So for example, a couple of years after Quicken launched, the team was running surveys and noticed something strange in their data. And that was a meaningful chunk of Quicken users were not individuals managing a household budget. Instead, they were small business owners using a personal finance tool to run their businesses on because the B2B accounting software available at the time was too clunky or complex and built for trained accountants. And so just to put that differently, Intuit built a bookkeeping tool so good that an entirely different customer cohort than they had targeted adopted the product in addition to what was originally their core customer.

37:19And so naturally, Intuit then focused on building a version specifically for these business owners. And that became QuickBooks. And this is the crown jewel of the business still to this day. And over the following decades, QuickBooks became really the standard in small business accounting in the United States. And that really is not an exaggeration because for context, we're talking about a market share as high as 85 to 90 % amongst small businesses. And so that is a, you tell me Kyle, that's getting pretty close to the M word, monopoly. Yes, it is. And what about TurboTax? So if you're helping people and businesses manage their money, taxes are sort of a clear vertical to move into next.

38:01They took their signature customer-centric focus to tax prep, and TurboTax quickly became the dominant do-it-yourself tax filing product in the country. So the main brick and mortar competitor historically had been H &R Block, but in the DIY software category, TurboTax became the runaway leader. And to this day, more than 40 million people file their taxes through TurboTax. So as we look at the business today, Intuit has assembled this collection of products that all sit at critical and recurring moments in a person's financial life. That's how I think about it. Or maybe a business's financial life.

38:42Your books have to be right. For example, your taxes have to be filed. If you're a small business, your employees have to get paid. These are not optional things. They're very, very high stakes. And again, as I realized with my own taxes, you want to have very high conviction and confidence in the accuracy of your filing, which for most people means connecting with a human accountant at some point in the process, or at a minimum, working with a brand that is as trusted as TurboTax and QuickBooks and Intuit generally, as opposed to some new upstart AI-powered tool. And so Intuit will proudly tell you on their earnings calls about how they're blending artificial intelligence with human intelligence too.

39:27So on the TurboTax live platform for getting human assistance, Intuit has more than 12 ,000 licensed accountants and tax attorneys that are ready to help you with really any problem you face. And so you can also connect with an accountant to do all the filing work for you through TurboTax, like I do with my accountant. And if you want more complete support, as opposed to getting limited access to tax professionals for specific questions, you can take that approach of getting connected with sort of a full-time accountant that works with you on a recurring basis. So point being, TurboTax offers a full spectrum of options for people's taxes, really based on the complexity and amount of help that they need.

40:13So there's actually no doubt that TurboTax is a great product that users love. Whenever tax season comes along, I remember seeing all sorts of department stores with Intuit TurboTax products prominently featured in high traffic areas. And this is in Canada specifically, not even the US, which you said basically a monopoly. So this is a product that is very, very well known. And I think if you asked a friend or a family member, if they've ever heard of TurboTax, there's a very, very good chance that the answer to that is going to be yes, which speaks to the monopoly-like characteristics of that business segment.

40:43But let's map out what the company actually kind of looks like today, because I know that they've kind of reorganized their reporting segments recently and that it can get somewhat confusing. It can. So I'll try to simplify it to the best of my ability. And two, it reports the business in essentially two big buckets. And so the larger bucket is called Global Business Solutions, very catchy name, and it's roughly 60 % of total revenue. So when you hear Global Business Solutions or GBS, just think about Intuit's small and medium sized business empire, basically. And the heart of that is QuickBooks, but it's wrapped around an increasingly large money business, as they refer to it.

41:25And so what that includes is payments, payroll, business checking accounts, lending, and bill pay services. And so not only are these very sticky parts of QuickBooks' various subscription offerings, but they're built on Intuit's underlying data advantage. And so for example, Intuit can see your cash flow and your payroll history, and then it can underwrite a short-term loan to help your company cover payroll in a month when cash is low. And it sort of reminds me of MercadoLibre, which people like to think of as the Amazon of Latin America for anybody not familiar with the company. And the reason I make the comparison is because they have all these data points on consumer shopping habits, and they actually use that information to issue credit cards to underbanked populations.

42:12So people that wouldn't otherwise have credit scores, they use this sort of alternative data source to determine their credit worthiness. And so in my opinion, Intuit is doing something similar with their customer data, but they're using it to build a fintech arm that's more focused on B2B offerings, products for small and medium businesses. And so they now actually carry almost$2 billion in net loan exposure from the loans that they've underwritten themselves. And the last part of this segment that I should mention is also MailChimp. And that is the email and marketing platform they acquired for$12 billion in 2021.

42:50And then the newest piece to the global business solution segment is something known as Intuit Enterprise Suite. And we'll get more into that too. Wow. So wait a minute. They went through quite an acquisitive spree during the pandemic though, didn't they? 20 billions on acquisitions in 12 months or so? It's true. And given that the MailChimp acquisition at least hasn't exactly been a home run. You can see why that same pace of M &A has not exactly continued. MailChimp is okay, but there's a lot of competition in email marketing platforms. And I would not say there's anything particularly unique about it that makes the business an obvious fit inside of Intuit's ecosystem.

43:32And so really the acquisition there was a little bizarre to me, honestly. And I think it's telling that when you hear management report growth figures and make growth projections, They literally do so by giving the numbers with and without accounting for MailChimp. And so that is absolutely not an accident. And I don't think it's an accident either that MailChimp's performance has largely been obfuscated by QuickBooks outperformance by clumping them together in the same reporting segment. So the MailChimp example kind of makes me think of one of Peter Lynch's principles of diversification, which I'm sure you've heard of before.

44:11His idea was that when a business gets flush with cash, instead of doing simple things like just paying a dividend or buying back shares, they decide to get a little bit fancy. And in that process, they can use the cash to buy businesses which are veiled as diversifying the business, but really just make the business worse. So in my view, MailChimp was kind of just that. But you said there are actually two buckets into its business. So that's the Global Business Solutions Group. The other bucket is obviously more on the consumer side of things with TurboTax and Credit Karma. That's right. Yeah.

44:41They actually combine consumer taxes and Credit Karma, but also their professional tax group that sells software to professional accountants. So like the accountant I work with, that is also included in this reporting structure as of 2025. So that's why it's a little confusing because it's consumer, but also there are professional accountants involved. It's just that really at the end of the day, the end customer is a B2C. it's not necessarily B2B. Okay. So I think we've kind of gotten the lay of the land here a bit for anyone wanting to dig into its financials. But I want to get back to your comment that QuickBooks has something like 80 % or more market share among small businesses, because that's an astronomically high number.

45:23Where exactly is that growth coming from when you have that degree of penetration? If you already own almost the entire market, you can't just continue adding customers on and on forever. So growth in QuickBooks can come from three levers. Lever one is price. When your entire financial history and your reconciled transactions, your payroll, your tax records, if you have all of that living inside of QuickBooks, a price bump of a few dollars a month is not going to be worth the enormous pain of migrating. And so Intuit it probably has a lot of untapped pricing power on that front still. And lever two boils down to cross-selling, which means selling each customer more services.

46:07So moving them from just accounting to maybe add-on subscriptions, like being able to process payments, payroll, and all that kind of stuff. And this is how combined with price eggs, you consistently grow average revenue per customer, which is a key metric for this company. And they may potentially be able to do so at double-digit percentages for a long time to come. That's my hope as a bull on the company. And this again is part of what they call the money business. Even if that doesn't get carved out and reported separately, it does appear to be growing very fast. Payment volumes facilitated by Intuit are up nearly 30 % year over year.

46:43So each one of those services deepens the relationship and raises the revenue per customer. And when I say payments processed by Intuit, this means the ability for a business owner to generate invoices. So imagine you're a farmer working at the local farmer's market. It's not as easy as you'd think it is to get the money from one bank account to another to get paid. And by just having an Intuit subscription, they give you the ability to create invoices that allow you to process payments. And so that's a huge value add for a lot of small businesses. And then the third lever, which I would say is the one Wall Street is most focused on, is moving upmarket into reaching bigger companies.

47:30And so that's what the Intuit Enterprise suite or IES is that I mentioned a minute ago. Yeah, that makes sense. The higher up the market you go, the more valuable each customer is. And correspondingly, the competitive intensity also increases too. So to what extent are they expanding their TAM attractively versus just widening their scope, but kind of getting bogged down by competitors in areas where they have maybe fewer and fewer advantages. The way I think about it is Intuit is more targeting a gap in the middle of the market than they are trying to go all the way up to providing business software for the largest corporations in the world.

48:06That's just not an area where they can compete. And so on one end of the market, you have a simple QuickBooks and that costs a small business, maybe 50 to 100 bucks or more a month at most, a couple hundred bucks. But on the other end, you have full enterprise resource planning systems like Oracle's NetSuite that runs tens of thousands of dollars a month. It takes years to implement. Then there's this enormous underserved middle market in between. And so what Intuit noticed was that, of course, many medium-sized businesses were once small businesses, which means that they were probably customers of Intuit at one point.

48:45And then for whatever reason, they grew out of the QuickBooks software and maybe their financial needs became too complicated for what could be tracked in QuickBooks. And so many of these companies though, could not justify or afford the cost of full ERP systems, Oracle NetSuite type systems, but they loved their QuickBooks subscriptions and they really were just wishing that they could get more out of them. So the Intuit Enterprise Suite really seeks to rectify that dynamic. And the hope is that maybe they can win over some new midsize clients. But long term, if they can just simply stop losing as many subscribers, as businesses mature to a more medium size, that actually can dramatically expand their earnings, assuming they continue to dominate the top of the funnel with small businesses.

49:35As we said earlier, it's far more cheaper to keep an existing customer than it is to acquire a new one. And so if they can keep small businesses as customers for longer as they progress into being medium-sized businesses, that is a huge boon for the overall company. I like this. I really like their strategy for lengthening the runway that they currently have. The lifetime value of the average customer can keep growing as Intuit improves its ability to cater to these kind of more and more mature businesses and reduce these unwanted churn where businesses didn't necessarily want to switch, but with no other option, they basically were forced to do so.

50:12Yeah. And they're already having success with it. So Intuit Enterprise Suite in its first year drove something like 40 % mid-market revenue growth. And QuickBooks customers who upgraded to IES more than doubled their spending with Intuit. So historically, a business would use QuickBooks for maybe seven to 15 years on average. But now, as you said, that runway can potentially be much, much longer. I think intuitive executive suite was kind of the logical choice for Intuit to develop internally. They wanted to avoid kind of that match.com issue where successful users of their product no longer have any actual use for it.

50:51So in Intuit's case, you don't want to lose customers who love your product just because they've gotten too big for it. So IES is kind of a way for Intuit to continue diversifying its services. And so far, it really appears to be the good kind of diversification based on those revenue growth numbers that you just quoted. So before we get to talking more and more about moats and the robustness of those moats, specifically in regards to AI, let's maybe linger a little bit longer on the consumer side of things. This really is what's driving most of the bearish sentiment on Wall Street today as I see it.

51:23That's probably fair. And so with DIY taxes being a roughly$5 billion addressable market. Intuit actually only sees that as being about 12 % of TurboTax's total opportunity. So while maybe that sounds promising or not, it's not helping sentiment that these DIY volumes on TurboTax have actually been declining slightly for a few years now. So even if you're more than making up for that by monetizing tax assistance on more complicated returns, the flywheel is premised on drawing in more users for free and then monetizing them over time as those users' taxes become more complex. But to very much simplify the narrative, if fewer and fewer people are entering the top of the funnel of the TurboTax ecosystem, then the terminal value of that business is going to suffer because eventually it catches up with you when customers stop flowing through the top of the funnel and you run out of customers to monetize lower down with more complicated tax assistance.

52:27I mean, you can kind of see why the market is uneasy here. Even if the slowdown in DIY tax filings has nothing to do with AI and is maybe just some sort of mean reversion thing because you had an abnormally large number of people filing taxes during the pandemic specifically to get tax credits, the market still has to react in case there is something more chronically wrong with the business. So we saw that with Netflix a few years ago. The pandemic pulled forward a lot of new subscriptions with people just being stuck at home. So when Netflix had its first ever decline in subscribers shortly thereafter, the market slipped over it, which in hindsight we can see was an overreaction, but it certainly wasn't obvious at that time.

53:05And that's why investing is so hard, as you know. Nothing is ever obvious. And you're trying to balance assessing how much truth there is to a concern versus how much is overblown panic. And the peak in DIY filings was 2022, which perhaps not coincidentally is right before ChatGPT launched, but also this was still a part of the COVID era too. So it makes things a little messy to break out and attribute the causes. But since then, TurboTax's federal DIY volumes are down 9 % cumulatively. So filings dropped about 5 % in 2023, and then less than 2 % in each of the next few years. And then there were some small declines in 2026.

53:47And you've also had this narrative for a long time out there that the IRS would create a direct e-filing system for free that cuts out middlemen like Intuit. And that was the bare argument before AI. And yet the IRS did actually try this, and it did not exactly catch on. And so the reality is that taxes are incredibly complicated, as we keep saying. And the government is not exactly famous for building great consumer-facing products to solve complex problems, but that is what Intuit is really good at, better than anyone at. And anyways, as we've talked through, all the money is in assisted taxes from H &R block offices to your local CPA.

54:27That's a roughly$37 billion market. And so that's 88 % of the total tax prep market for context. And so the DIY software slice that everybody's obsessing over here is, it is real money, but the big money has always been in the smaller percentage of people paying for professional assistance. Plus, TurboTax Live has actually been the fastest growing part of the consumer business by a mile. It's not even close. It's compounded at something 38 % a year for over five years now, and now represents a majority of TurboTax's total revenue. Yeah. So kind of what I'm hearing here is that TurboTax clearly isn't dying so much as maybe the low end of the tax market is slowly maturing while the company uses that foundation as a launch pad specifically to attack a market that is literally 10 times larger.

55:21And they do seem to be succeeding in doing so. That's the whole point. The bears to me are hyper fixating on the small mature slice that's shrinking at 1 % a year and then declaring victory as the stock has fallen. While the company is actually taking share in a bigger market, it barely used to touch. And then the AI angle actually accelerates this because a hybrid of AI plus human expertise, to me, seems like a fantastic way to deliver different tiers of paid tax prep assistance at scale. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher.

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59:18So make the case for Intuit's moat. Why hasn't some startup or maybe even Anthropic or OpenAI, come in and try to disrupt them. I really don't want to underestimate the importance of switching costs. When you're talking about migrating your financial books and transaction records, you're talking about taking on huge costs if things go wrong to save yourself a pretty negligible subscription fee. And so on the consumer tax side, the switching cost argument is maybe a little less persuasive, but still TurboTax already has all of your prior year information and just auto fills it and that can save you hours.

59:57And so that would be one motivation just to keep coming back. Okay. I can kind of get behind the QuickBooks switching costs there for sure, but I don't think this is where the market is most nervous anyways. A bear would say that an AI agent could do the painful migration for you as a business and it could definitely re-enter all your tax info automatically just by reading your documents. So if all Intuit has are switching costs around one of its biggest businesses, then I can absolutely see how half of Intuit's market cap has justifiably been cut in half. Half of the business's total earnings could theoretically be at risk if, say, the TurboTax business goes the way of Blockbuster over the next decade.

1:00:33In that case, the market's reaction today wouldn't really seem so exaggerated, wouldn't it? That's probably fair. And I do also think that proprietary data is a big part of the QuickBooks and TurboTax moat, along with already having distribution in place. And so a chatbot can scan the internet, yes, but Intuit knows what actually happened on tens of millions of real tax returns and on the small business ledgers of millions of companies. And that is not data that you can legally source to the same extent as an Intuit competitor. And we're seeing them increasingly roll this data into growing the fintech business.

1:01:11And so I used the payroll example earlier, but really they can see at exactly which moment a business needs capital and then actually underwrite a variety of different types of loans with far better information than what a bank would have. And so the way this broadly works is that they do actually have banking partners that make the loans for them technically, since Intuit is not a bank, but Intuit agrees to then immediately repurchase all or a percentage of those loans from their partner banks. And so the way it works from there is that Intuit keeps a portion of their loans on their books and hopefully gets repaid by customers, or they sell the loans off to institutional investors on Wall Street if they want to reduce some of their credit risk exposure on their balance sheet.

1:01:55And so we're talking about purchasing billions of dollars in business loans and the data advantage underpinning that I do think lowers their lending risk, but it also locks in customers even further. That's sort of a subtle point that works in their favor. So what I mean is that even if a better bookkeeping tool comes along the market, maybe an AI-based one, the question is, are you really going to switch to it if you rely on Intuit for getting financing to pay your bills? And my answer to that would be probably not. Yeah. The loan book part of Intuit that you just discussed there kind of reminds me of a business that I pitched to you a while back in NVR.

1:02:35So NVR would originate the loan, then sell them to a third party and collect a fee. Now, it wasn't a huge part of their business, but it still generated this kind of high margin revenue and provided some extra revenue, which is never a bad thing as long as risk is controlled and you're not hyper cyclical. But similar to Intuit, NVR had access to large amounts of this kind of proprietary data that it could use to create these loans. Now, it's kind of hard to say how proprietary this data is in Intuit's case, but my guess is that they would have some very, very good insights that an LLM simply would not have any access to.

1:03:08And to your point about increasing customer lock-in, that's just really hard to argue against. If Intuit is taking care of your financing, then an AI bookkeeping model will have to offer much more than just an AI chatbot and some lower prices to get customers to switch over to their product. But how about we allow ourselves to indulge a little bit and consider a bull case where AI is an actual boon for Intuit? What would that look like? Intuit has been building what they call GenOS. And essentially, that's their own generative AI operating system. And on top of it, they're rolling out AI agents.

1:03:42And so the vision they talk about is moving from software tools where you're the one doing the work to done-for-you experiences where AI agents act like a virtual team to manage your financial workflows. And so that could be everything from getting a customer lead to getting paid from a sale, whereas they put it a lead to cash end-to-end system. And so their accounting AI agents are actually already doing work at scale. So I would say that's the vision for how Intuit is going to continue to create value and potentially drive excess returns in this post-AI world, because they have the distribution and the data to do the best job building the agents that are going to revolutionize these workflows.

1:04:29Yeah, I'll be the first to say that the kind of done for you framing is very compelling. But Intuit is very much not the only software company on earth saying some version of that right now in response to AI, which is that AI is actually helping them. So why should we believe Intuit's management team in particular? There are at least three things you actually need to make agentic AI business models work. And so you need proprietary data for data accuracy. We've talked about that already. You need distribution to tens of millions of customers that you can deploy the agents to. Intuit has that. And so you need a trusted brand, and I would subjectively argue a human backstop.

1:05:10So people will actually let the AI touch their money, right? Can you imagine what it takes for you to feel comfortable allowing an AI agent to access your bank account? And I don't know how easy it will be to accomplish that. But if anybody has the brand and the resources and the data and the team of human expertise to sort of fill in the confidence gap that people need to feel comfortable allowing AI agents to have that kind of access, I would say that exclusively belongs to Intuit. And so a brilliant AI model with no data, no distribution, and no trust is nothing. And so there's this great analogy that I actually came across for how to think about agentic AI and what it means here.

1:05:58And so just to pass it along, imagine you go to a hardware store, let's say, and you buy a drill. And so normally you would bring it home and you would do the work, obviously. And you measure, you do the drilling, you build a shelf. Agentic AI is the idea of that drill growing legs, walking over to the wall, and then building the shelf for you while you sit back and have a coffee. And so in this analogy, the drill is your accounting software. And instead of passively tracking expenses, it's actively reconciling your books, paying your bills, lending your capital, and getting your taxes ready while you sleep.

1:06:34And so just like how I think the company that dominates traditional internet search in Alphabet is best positioned to dominate chatbot-based search. I also think that the company best positioned to build an ecosystem of trustworthy, autonomous financial assistance for individuals and small businesses is by far the one that is already sitting on your financial data and already has that trust. And that would be, of course, Intuit. I will admit that is pretty compelling. And to your analogy there, you might even add that they'll go to your store for you and get your inputs for you as well as just building the shelf.

1:07:09So if I was a business owner of a small or medium-sized business, I think I'd be all over this specific product offering. And from my research, once a customer of an SMB are embedded into its products, the chances of them leaving are very, very low. So where I think Intuit has an advantage is in this form of financial integrations that AI, as it currently stands, just simply can't replicate as you just kind of mentioned there. So just to kind of give an example, on QuickBooks Online, you can actually directly link your bank account. So when you make a transaction from the bank account, QuickBooks Online will automatically sort the transactions out for you specifically for bookkeeping and tax purposes.

1:07:47Now, could you get this done with AI? Maybe, but it would require some annual labor on your end. But if you're a business owner, I think the chances are pretty high that you're probably going to want to allocate your time to just running your business and not using Claude Cowork to save a few bucks on your bookkeeping expenses. So if management is so confident in their positioning, why did they just recently announce a 17 % workforce layoff? Is AI already creating these massive efficiencies internally, or is it about signaling cost discipline to Wall Street? I think the reality is that when you're running a company that has seen its stock just get wiped out by 60%, it does feel psychologically important to employees and management to feel like there's a floor beneath your feet.

1:08:33And one way that you can do that is by promising to trim the workforce and to also spend$8 billion on share buybacks, which is the other piece of context here. So it's really impressive to me is that Intuit's revenue per employee since 2017 has risen from 633 ,000 per employee to an estimated $1.2 million per employee after these cuts. So just an incredibly profitable business. and they've shown an ability to generate dramatically more revenue with less. And you could also think of this as being like operating leverage. And supposedly the cuts are being done to weed out unnecessary middle management and to make Intuit a leaner and faster organization, which is pretty standard corporate speak.

1:09:17But I do think that if the stock had not come under such remarkable pressure, you probably don't make these moves while everything else is seemingly going well. So that's my speculation. And to the extent that this is true, it would be a bit of a modest yellow flag because you don't want management to be running the business with a focus on the short-term stock price over what's best for the business long-term. So that's something for us to keep in mind as we continue to keep an eye on Intuit. I wouldn't say it's a disqualifying concern in my book, but it is something where you're reading between the lines and really want to understand why that decision was made.

1:09:56Yeah. And doing the same thing, reading between the lines there, if you look at it from the positive aspect, it just means that they're hopefully going to continue making the same amount of revenue, if not more. And now their operating expenses have gone down, meaning you should even maybe even see some operating leverage, which is obviously a great thing to see and something that they've been very good at developing in their past. So with all that said, I think it's a great segue here to talk more about the people running this company and how they spend the corporate treasury, because obviously a cash machine like Intuit lives and dies really on their ability to allocate capital properly.

1:10:30The CEO is Zazan Ghadarzi, who has been running the company since 2019 and came up through the business. He actually ran the small business group and the consumer group before taking the top job. So I like that he knows all the products intimately. Scott Cook, the founder, is still around as chairman of the executive committee. So there is still that founder DNA that's kind of lingering around. And then I would generally characterize management as competent, mission-driven, and clearly aggressive about pushing the company into AI tools and upmarket. And so their slated long-term target is to accelerate revenue growth back toward 20 % a year by 2030, which is ambitious, but I love it.

1:11:12it's certainly completely at odds with the narrative that you're seeing from the market. And you actually might find this interesting, Kyle. 95 % of the CEO's comp is performance-based, which is, I think, a good thing, but it comes with an annual bonus split between revenue and non-GAAP operating income metrics, which are less of a good thing. Yeah. There's parts of that comp structure that I definitely like and something that I dislike. I really like that 95 % composition weighting as being performance-based. Love that. That this means that Sasan Ghadarci cannot just sit on his laurels and expect to be paid.

1:11:45He literally has to perform in order to earn his incentive. But the revenue and non-gap operating income metrics are, as you'd assume, not the ones that I think best align management with shareholders. And then longer term equity incentives are largely paid out based on total shareholder returns over 36 months relative to a set of peer companies. So that's good. That's a check. That's a pro. But I'm always dubious, though, of how the peer comp sets are defined when you have this kind of setup and whether management is being given a layup to earn their stock-based comp against some arbitrary definition of companies that are peers and aren't peers, where they're being set to compete against inferior companies.

1:12:27And I also wouldn't necessarily say that 36 months is what I would consider longer term, but you got to get what you can take sometimes. And all in all, it's not a non-starter comp package. It has good things about it. It has bad things about it. But again, for me, it's not necessarily something that would disqualify me from wanting to invest in the business. It probably doesn't rev up my enthusiasm, but not necessarily a disqualifying factor. So one other detail here is that Intuit's CEO is required to hold 10 times his base salary in stock. That sounds good. But when you remember that it's a very modest base salary to judge against, since it's 95 % of his comp is coming from bonuses, well, then that sort of just makes it feel silly.

1:13:11And what that actually means is Ghidorzi only owns about$5 million worth of shares after seven years as CEO. And I find that really disappointing and really not one of the most inspiring parts of the thesis. It's not terrible, but it's not inspiring. On the other hand, management does combine to own about 2.5 % of all shares outstanding, which is pretty good for a company of this size. And with Scott Cook as founder of the company, he still owns$1.5 billion worth of stock. So he definitely has skin in the game as chairman of the board and is making sure that the culture of the company is not moving in the wrong direction.

1:13:48Now, there's kind of a red or yellow flag here that I need to ask you about here. And that's that about 10 % of revenue is paid in stock based comp, if I'm reading this correctly. So I wouldn't say that stock based comp here is modest here at all within to it. Honestly, it's kind of a bit concerning to me that we've seen SBC as a share of revenue increasing over time. That's not supposed to happen. It's actually doubled as a share of revenue since 2020. And the result of that, and also the acquisitions is that we've seen the share count compound at about 1 % per year since 2020, which isn't egregious, but that's still a very real dilution cost.

1:14:22And as we've seen the buyback yield spike as the stock has declined, and as they've committed more and more to buybacks, I'd say this isn't entirely just a signal strength. You very much need to be buying back billions of stock just to offset the shares that you've been issuing. But at the same time, beside previously scheduled repurchases, there's not really any indication that management is putting their own money to work buying shares if they believe that they're materially undervalued. What's also true, and as we bring it all together, I should mention there's a modest dividend for us to factor into our expected returns.

1:14:53They pay out about 20 % of earnings as a dividend. And the good thing is when you gush cash the way this business does with really high margins, you can afford to do three things simultaneously. And that is adequately reinvest in your business, repurchase shares to shrink the share count, and also to pay dividends. Those are sort of the three pillars of shareholder returns. Well, that's our cue. Let's talk more about valuation. And I want to hold you to your own standard here because you're the one who's always saying that a great business is only a great investment at the right price. Now, I would say that the parts of Intuit kind of have me at a little bit of odds.

1:15:35QuickBooks is a great business. TurboTax is a decent business. Credit Karma is a solid part, I think, of the entire flywheel. But then you get to MailChimp, which most definitely is the weak link. So the quality here is kind of mixed, but overall, it's pretty good. And so the question is, what's the price? Is it right? Starting with a basic just price to earnings lens at around$270 a share, which is where we're at at the time of recording, Intuit trades at roughly 15 to 16 times trailing earnings on a reported basis. And so to me, that's very attractive. And it's even more attractive when you look at the forward PE projections that put it at about 10 times earnings.

1:16:14So as the business keeps growing, if the stock is flat, the discounted intrinsic value, of course, will only widen. And honestly, coming down from 60 times earnings, I do feel as though that's a pretty sufficient margin of safety. And it's not to say that Intuit can't go lower, but it's definitely not a half bad entry point. Okay. But a cheap multiple on a company the market thinks is completely impaired isn't automatically a bargain, it could also be a value trap. So what's your estimate of what the company is actually worth? With the usual caveats about financial modeling, I do run through three scenarios where the business sees TurboTax basically flatline in a bear case.

1:16:54Things keep chugging along as management expects in the base case. And then in the bull case, you have a scenario where AI really helps drive growth and further profit margin expansion, because they're able to get more revenue out of each employee they have on their team. That's a great example of that. And if that trend continues, that would be a great illustration of what the bull case looks like. And so anyways, with a pretty crude approach to that modeling, accounting for dividends, I see Intuit's fair value as being about$400 per share. And so stacking on an additional, just arbitrary number here, but an additional 20 % margin of safety suggests that shares are attractive to buy at around$320 or lower.

1:17:36And just to quickly mention it, if you want to see my model, you can click down into the show notes for the episode, into the description. It's going to be available to download entirely for free, and you can look through my model and my assumptions. And so at current prices, the expected return from the model is 18 % a year per year over the next five years. And that is just sort of a mathematical calculation. But I actually think a lot of those returns will be front loaded. And so at some point, me speculating here, maybe later this year or next, I would not be surprised if the narrative switches again and Intuit rallies significantly in the same way that Alphabet rallied last year when the narrative flipped with ChatGBT being a competitor or not.

1:18:19And so again, that's my speculation. And so it's also not uncommon to see the S &P's worst performer in one year become one of the better, if not the best performers, the following year. That's a well-known pattern. So with all that said, I am pretty excited for a variety of reasons about buying into it below$300 per share. To me, it feels like a real bargain, and I would love to add it to the intrinsic value portfolio. And personally, I would probably be comfortable making it as much as a 5 % position in the portfolio. But if you have hesitancies, Kyle, maybe we can treat it as a 2 % tracker position for now.

1:18:55And then we should obviously get Daniel's input too. I know he's overheard our conversations about Intuit and I would love to hear where he lands on it. So yeah, what's your take, Kyle? Yeah. I mean, I think you've definitely sold me on Intuit more so than what I used to think about it before kind of researching this and before hearing more about your thesis. I think Intuit is very clearly a high quality business. But for me, I think the question really comes down to whether the business's moat is widening or shrinking. To me, QuickBooks Online, which I think we've made really apparent here, is the crown jewel.

1:19:28But I do have some questions on the other three segments that I don't think they're necessarily a zero by any means, but I think I'd want to spend some more time really understanding them before wanting this to be a completely full 5 % position. I will say this, the business is super cheap. I'm right there with you. I think Intuit, similar to some of the other SaaS themes that we've covered, Constellation Software, for instance, have just been completely unfairly punished. Intuit has some real switching costs. And I think that's going to keep them competitive a lot longer than the market is currently evaluating them for.

1:19:58So I think we kind of maybe stick with this 2 % track position and then add on increased conviction or if the price continues to drop. Okay. All right. So we'll be adding Intuit to our portfolio. And as always, if you want to follow along with the portfolio and see what it looks like, you can sign up for our intrinsic value newsletter, just head over to theinvestorspodcast.com. That's completely for free. And with that, folks, let me leave everyone with a quote from Intuit's founder, Scott Cook, that I think captures why I'm willing to step in here and invest while a lot of other people are running for the exit.

1:20:33So Cook said, instead of focusing on the competition, focus on the customer. And the market right now is telling itself a story that AI makes Intuit obsolete. But the people who actually use Intuit and QuickBooks every day are telling each other something completely different, including me as a user. And Intuit has shown that culturally, there is a maniacal focus on the customer first, sort of like Amazon, which is famous for that. And so I think that makes it a very hard business to beat. And with that, we will see you all again next time.

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