The U.S. Federal Reserve is sticking to its plan to raise interest rates in an attempt to bring down inflation. The bad news is that higher rates mean short-term economic pain, especially for households and small businesses.
In spite of these challenges brought on by the Fed, financial software company Intuit (INTU 0.75%) is sticking to its own game plan and expects more upside for its business in the next year. Now looks like a good time to give this fintech leader a close look.
Intuit's customer base is more resilient than it gets credit for
Intuit had a fantastic fiscal 2022 (the 12-month period ended July 2022). Total revenue was $12.7 billion, up 32% year over year -- or up 24% when excluding the acquisition of MailChimp last November. Adjusted earnings per share increased 22%, trailing revenue growth largely due to increased stock-based compensation related to the MailChimp deal.
More importantly, Intuit management provided a strong outlook for fiscal 2023. Guidance calls for revenue of $14.5 billion to $14.7 billion, which implies overall growth of 14% to 16%. Adjusted earnings per share should increase 15% to 17%. This rate of earnings growth is being dragged down again by more stock-based compensation related to MailChimp, but Intuit predicts this level of new stock issuance paid to employees will level off. The company is also buying back stock to help offset dilution for shareholders.
Granted, this outlook does imply a slowdown from Intuit's recent trajectory. Credit Karma, which was acquired nearly two years ago now, is coming off of an incredible fiscal 2022 in which its revenue surged 58% from 2021. However, given rising interest rates and pressure on consumers from inflation, management is guiding for 10% to 15% growth from Credit Karma in fiscal 2023.
Let's not take too much away from Intuit's consumer-credit-centric business. Some other consumer-focused fintech outfits are reporting declines in revenue as interest rates come off of historic lows. Intuit's large tax software business (Turbo Tax) and small business software tools (QuickBooks, MailChimp) are indispensable. Even as belt-tightening crops up in some areas of the economy, Intuit expects its small business segment to grow upward of 20% in fiscal 2023.
While many of its peers struggle, it would seem Intuit was built to shine during this period of time when easy money dries up.
A fintech stock that's growing and profitable
After the last quarterly update, Intuit stock trades for 34 times enterprise value to trailing-12-month free cash flow. It's a premium price tag, especially for a company that is anticipating its growth rate to cool down in the next year. After the Credit Karma and MailChimp purchases, the balance sheet is also a bit upside down with $3.3 billion in cash and investments but $6.9 billion in debt.
Nevertheless, since the company has proved Credit Karma and MailChimp are a good fit within its small business software ecosystem, I'm willing to make a small initial purchase of Intuit with the intent of nibbling on more over time. As the company tightens up the integrations among its various products, profitability should rise at a faster pace than revenue. Its free-cash-flow margin is also very healthy at nearly 29% over the last year. That steady flow of cash should help clean up the balance sheet over time.
At the end of the day, though, what I like most about Intuit is its resilience even as times get tougher for its consumer and small-business customers. Few of its peers in the fintech space can boast the same. That speaks volumes to the importance of Intuit to its users and bodes well for shareholders long term.
