Intuit's (INTU -0.53%) acquisition of personal finance site Credit Karma, announced Monday alongside its fiscal second-quarter 2020 earnings, is a pretty sizable deal: Intuit will fork over total consideration of $7.1 billion, funded equally between cash and Intuit stock, to fold in the popular finance destination. Per CFO Michelle Clatterbuck in the company's earnings conference call on Monday, Intuit will supply the cash portion through existing resources and by utilizing its $1 billion unsecured revolving credit facility.
How can shareholders determine whether this princely sum is appropriate considering the assets being acquired? Intuit relayed that Credit Karma's revenue, based on unaudited results, expanded by 20% in 2019, to $1 billion. The company didn't provide any insight into Credit Karma's profitability, but we can make an educated guess that it's unlikely to enjoy a profit margin anywhere near Intuit's high annual net profit margin of 23%. This is because management expects the transaction to be "neutral to accretive" to Intuit's non-GAAP (adjusted) earnings per share in the first full fiscal year after the deal closes.
This leaves investors with a single yardstick to gauge the deal's reasonableness: Intuit is buying Credit Karma at a multiple of seven times its annual sales. This seems a steep price on the surface, especially since management doesn't project an immediate, quantifiable impact on 2021 fiscal earnings per share.
Yet, as a strategic acquisition, the hefty purchase size may be warranted. Intuit has a long history of attempting to extend beyond its tax and small business accounting base into personal finance, from personal bookkeeping product Quicken (which it sold in 2016) to net-worth tracking platform Mint, to its relatively new Turbo offering. Turbo combines income data gathered from Intuit's TurboTax users (with their consent) with credit scoring to generate offers for home, auto, and personal loans from financial service providers.
Turbo seeks to add incremental revenue to Intuit's coffers in a manner quite similar to that of Credit Karma's primary offering: linking customers with service partners to help optimize their finances. Credit Karma has over 106 million customers on its Artificial Intelligence (AI)-powered platform, which acts as a personalized financial assistant. According to Intuit's press release on the transaction, Credit Karma owns the "largest engaged member base in consumer digital finance." The company boasts an extremely high rate of engagement: 37 million of its customers use the platform more than four times a month. And Credit Karma works with a plethora of service providers, teaming up with more than 100 partners that offer home, auto, and personal loans, as well as high-yield savings accounts and insurance products.
Credit Karma's reach helps illuminate Intuit's willingness to front the large purchase multiple. The transaction will roughly double the tech giant's total addressable market (TAM) in personal finance products from $29 billion to $57 billion. Yet access to Credit Karma's customers also introduces cross-selling opportunities, reducing Intuit's cost to acquire customers for its tax and small business products while opening a new avenue for Credit Karma to amplify its own user numbers. I presume that in its pre-deal due diligence, Intuit ascertained that the two companies don't have a huge overlap in existing customers.
Perhaps most importantly, Intuit may be able to significantly boost Credit Karma's value proposition to its customers by linking income data from TurboTax (as Turbo now offers) to their existing shared credit information, potentially exposing Credit Karma's customers to better offers from service providers.
Intuit states Credit Karma will continue to operate under its own banner, and I expect that at some point, Turbo will be folded into Credit Karma's brand. Given Intuit's deep pockets, the long-term opportunity to scale the Credit Karma brand after a one-to-two year integration period likely shows a high internal rate of return in management's calculations. Over time, then, the massive price tag may not seem so luxe.
Of course, the FinTech space is highly competitive and prone to disruption -- there's no guarantee that Intuit will see resounding success from attaching Credit Karma to its portfolio of brands. But overall, the purchase multiple, although high, isn't egregious. In fact, over the last two years, due to its stock price ascent, Intuit itself has traded at well over seven times sales -- it currently sports a price-to-sales ratio of 10.5. So, viewed through this lens, Intuit is purchasing Credit Karma at a discount to its own market pricing. Smarter yet, it's using its own, higher-priced equity to fund half the deal.