It seemed like few tech stocks could catch a break during first-quarter 2022 earnings season. With the market overall in retreat due to inflation worries, the U.S. Federal Reserve's interest rate hikes, and growing concern over an economic slowdown, shares of many companies were punished regardless of whether they beat or missed financial performance expectations during the first few months of the year.
Financial software titan Intuit (INTU 0.73%) was an exception. Shares of the company best known for TurboTax and QuickBooks are up some 14% in the weeks following its earnings update in late May. Two big bets the company recently made are starting to pay off, and there could be a lot more upside ahead for Intuit.
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Over $20 billion in acquisitions
Intuit dropped a sizable amount of cash and new stock to make two acquisitions in the last 18 months: $8.1 billion ($3.4 billion in cash and $4.7 billion in stock) for Credit Karma in December 2020, and $12 billion ($5.7 billion in cash and $6.3 billion in stock) for Mailchimp in November 2021.
Given that Intuit's business revolves around financial management and tax return software, I had my doubts about both of these purchases. Credit Karma helps consumers find financial services products like credit cards and auto loans. It also provides some basic services itself, like an online-based checking account and linked debit card. Then to further muddy the waters came Mailchimp, which provides marketing and management tools for small businesses. Not only do the two acquisitions have little common ground, neither have much to do with Intuit's core services.
Absolutely killing it as stand-alone entities
After Intuit's latest quarterly update (Q3 of fiscal 2022, the three-month period ended April 30, 2022), I'm not so critical of Intuit's spending spree. Credit Karma grew revenue 48% year over year last quarter to $468 million. Operating income was $104 million. In the three quarters Intuit owned Credit Karma last year, revenue totaled just $865 million, and operating income was a meager $182 million.
The company provided a little less granularity on its more recent Mailchimp purchase, but it expects the latter's total revenue contribution to be at least $765 million for fiscal 2022. Mailchimp reports under Intuit's "small business and self-employed group" segment, which expects total revenue growth of 36% to 37% this year. That's an increase from previous guidance for 32% to 33%. Backing out Mailchimp, this segment is now expected to grow 20% in fiscal 2022.
Though Intuit paid a premium for Credit Karma and Mailchimp, the two acquisitions are accounting for a large chunk of Intuit's overall growth right now. In total, the two acquired businesses hauled in $725 million in revenue in the last quarter, or 13% of Intuit's total revenue.
More than just boosting the top line
Things get really interesting when Intuit starts talking about what it's doing with Credit Karma and Mailchimp. This is far more than an attempt to grow via acquisition. Intuit is building a new ecosystem of highly profitable tools to empower consumers and small businesses.
For example, the company is using its popular TurboTax service to cross-promote Credit Karma. A tax filer could opt to have a refund directly deposited into their Credit Karma Money account, up to five days earlier than a refund sent to a different bank account or received via snail mail. Once in the Credit Karma ecosystem, consumer engagement increases across other services.
Something similar is happening with QuickBooks and Mailchimp. Intuit recently introduced the ability for businesses to export their customer data over to Mailchimp. From there, they can organize customers by metrics like spending habits to help curate marketing campaigns and automate other daily customer engagement activities.
In other words, Intuit's recent acquisitions don't look so far into left field anymore. Credit Karma and Mailchimp look like natural extensions to what Intuit was already doing.
Shares of the financial software giant trade for just under 30 times trailing-12-month free cash flow as of this writing, a metric that's sure to improve as Intuit further unlocks value from Credit Karma and Mailchimp and laps some of the one-time expenses related to the acquisition in the quarters ahead. I'm not ready to pull the trigger on a purchase just yet, but I've added Intuit to my list of top fintech stocks to keep an eye on right now.
