The Cash Machine The Market Put On Sale: INTU

The market is selling shares in a software giant as if its cash-generating days are numbered, yet the business is paying out more than double the average company.

Intuit (INTU), the company behind TurboTax and QuickBooks, currently trades around $289.92 a share, a level that reflects a steep decline of 28% over the last three months. Yet for every dollar an investor parks in the stock, the business hands back 9.6% in annual free cash. That free cash flow yield is more than double the 4.1% paid by the median S&P 500 company. The market is offering premium cash flow at a discount price. The question is whether this is a genuine bargain on a durable machine, or if the market is correctly pricing in a future breakdown.

So where is all this cash coming from?

This level of profitability is not a recent fluke. Intuit’s operating margin over the last twelve months was 28%, comfortably above its three-year average of 26%. The cash is generated by its core software businesses, which serve millions of consumers and small businesses. While the company is a mature software provider, it has found powerful new sources of expansion. Management recently highlighted that its key growth areas, assisted tax, its money portfolio, and mid-market, are all expanding at a rapid clip, with each segment “growing north of 30%.”

The most significant driver is the strategic shift toward human-assisted services. The company’s TurboTax Live offering, which connects filers with tax experts, is a standout. Management expects TurboTax Live revenue to grow 36% this year. This single service is on track to represent 53% of total TurboTax revenue, a testament to a successful pivot into higher-value services. Some analysis suggests certain stocks can be priced like a decline but paying like a machine, and Intuit’s numbers seem to fit that description.

Why would the market discount a business with these growth engines?

For the market to be right, the cash flow has to be at risk. The primary concern centers on the company’s original Do-It-Yourself (DIY) tax business. Management is “constructively dissatisfied” with its performance in this segment, admitting that among the most price-sensitive filers, “We lost on price.” This isn’t a new issue, and it creates a drag on the overall consumer story. The problem is compounded by a broader market contraction, as total IRS filers are expected to decline by approximately 30-basis-points this season.

There is also a drag from a past acquisition. Revenue from Mailchimp was “down slightly versus a year ago,” prompting the company to rightsize its investment in the unit. The market’s apprehension is that the pricing pressure in the core DIY segment and the underperformance of Mailchimp are persistent problems that could erode the impressive gains being made elsewhere.

Can the pivot to ‘assisted tax’ keep the machine running?

Intuit’s case rests on its ability to successfully navigate this transition. The company is aggressively targeting the $37 billion assisted tax category, which makes up 88% of the total addressable market for TurboTax. This is where the growth is, and where the company is already winning. For the challenged DIY segment, the plan is to “evolve our business model” to compete on price while using the broader consumer platform, including Credit Karma, to monetize customers in other ways.

For investors who prefer to own the theme rather than a single name, a broader exposure is available elsewhere. But for Intuit, the test is specific. The company’s long-term expectation for TurboTax Live revenue growth is 15% to 20%. The key thing to watch is the growth in TurboTax Live customers, which is expected to hit 38% this year. The durability of that high growth rate will determine if today’s cash offer is a temporary bargain or a permanent markdown.

If cash-rich businesses on a pullback are what you hunt, our Buy the Dip screen ranks the names where a dip meets fundamentals that still hold up.

And for anyone who would rather own the whole group than one company’s story, a software ETF like IGV owns the whole group. It is still a concentrated bet on that one theme, though, which is exactly the gap the portfolio below closes.

One Cash Machine Is A Find. Thirty Is A Strategy

A business that hands back this much cash at this price is exactly the kind of setup worth hunting. But one company’s cash flow, however strong today, is still one company’s cash flow, and a single supplier stumble or demand wobble can change the math while you wait.

The Trefis High Quality (HQ) Portfolio is built on the trait you just read about: roughly 30 businesses selected for consistent cash generation, strong margins, and resilient balance sheets, sized and re-balanced with rules. It has a track record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000. Keep hunting the cash machines; let a basket of them do the compounding.