James Buchanan, Investment Analyst
Running a small business involves a mountain of paperwork – managing the accounts, running payroll, reconciling bank statements, and preparing tax returns. In the United States, more than five million small businesses outsource all of that to a single piece of software called QuickBooks, made by a company called Intuit. Think of it as the American version of Xero – but an order of magnitude larger.
Intuit’s other major business is TurboTax, the dominant tax filing software in the US, used by more than 40 million Americans each year to prepare their tax returns – something that, unlike in New Zealand, most Americans have to do themselves.
Why did we invest?
Two things stood out to us about Intuit. The first is its long-term track record. Intuit has a highly recurring revenue stream that has grown at double-digit rates for more than a decade. Once a small business has implemented QuickBooks, they often purchase additional software modules as they grow. This drives incremental revenue for Intuit and increases customer stickiness. The more products a customer uses, the harder it is to switch to another provider.
The second is the opportunity Intuit has in the mid-market. Each year, roughly 10% of Intuit’s small business customers outgrow the basic QuickBooks product. Historically, those customers would move on to more expensive enterprise software from a competitor. That has now changed – Intuit has rolled out a more advanced product called Intuit Enterprise Suite, designed to keep those customers on the platform and to win mid-sized businesses Intuit hasn’t traditionally competed for.
How has the stock performed?
The stock, along with the broader software sector, has underperformed the market year-to-date. The market’s concern is that artificial intelligence (AI) will eventually disrupt the industry – that AI tools will one day let small businesses and consumers do their own accounting and tax work, without needing to pay for dedicated software.
We think there are risks facing the broader software sector, but in Intuit’s case we believe the business has durable moats that should help insulate it. The first is the value of the software relative to its cost. A QuickBooks subscription starts at just $US21 a month, yet saves the typical business owner several hours of work every week. The software more than pays for itself in labour savings. The second is Intuit’s distribution channel. American small businesses lean heavily on their accountants when it comes to filing taxes, and those accountants typically only support one or two software platforms. Intuit has spent decades building relationships with hundreds of thousands of accountants across the US – a network that would take a new competitor many years to replicate.
What’s the outlook from here?
Looking ahead, AI could potentially end up being more of an opportunity for Intuit than a threat.
Intuit has something most AI start-ups don’t – more than 30 years of customer data, the trust of hundreds of thousands of accountants and small business owners, and deep integrations into banks and payroll systems. Over time, we expect Intuit to roll out AI-powered features across its existing products, automating more of the tedious work and making the software smarter to use. If it plays out the way we think, that should deepen customer engagement with the platform, and give Intuit scope to upsell customers to a higher, AI-powered tier.
However, Intuit’s revenue stream is also remarkably stable. Businesses of all sizes need accounting and tax software regardless of the economic backdrop, and that kind of recurring, subscription-based revenue tends to hold up well when markets are volatile. Combined with the quality of the underlying business and a reasonable valuation, it’s a company we’re comfortable owning despite the potential for volatility. This, however, could take some time to materialise, and AI could be perceived as more of a risk than an opportunity in the short term, creating volatility in the share price.
