Intuit (INTU -0.53%) stock often trades at a significant premium to the rest of the stock market, particularly after rising 13% year to date. As of this writing, for instance, the stock has a price-to-earnings ratio of 65. Compare that with the average price-to-earnings ratio of stocks in the S&P 500 of 18.
Sure, Intuit's high-quality business model, which provides a consistent stream of cash flow for the company to reinvest into its business, pay dividends, and repurchase shares, deserves a high price-to-earnings multiple. But has the valuation run up too much recently?
To find out whether shares of the tech stock have become overvalued, let's take a closer look at Intuit's business, which includes software-as-a-service (SaaS) platforms TurboTax, Credit Karma, QuickBooks, and Mailchimp under its ownership.
Strong growth in an uncertain environment
Inuit said in late February that its fiscal second-quarter revenue grew 14% year over year.
Importantly, revenue from its online ecosystem segment, which includes revenue from its most important growth drivers, increased 24% to $1.4 billion, accounting for nearly half of the quarter's revenue. This key segment includes revenue from various online-based QuickBooks products like QuickBooks Online and QuickBooks Live; online payroll services like QuickBooks Online Payroll and Intuit Online Payroll; payment processing services; Mailchimp's e-commerce, marketing, and customer relationship management offerings; financing products for small business; and more.
Worth calling out is Intuit's QuickBooks Online accounting revenue, which increased 27% year over year during the quarter.
All of this led to a 42% year-over-year increase in adjusted earnings per share.
The company also notably guided for strong revenue and earnings growth for the full year of fiscal 2023. Specifically, management said it expects non-GAAP (generally accepted accounting principles) earnings per share to increase between 17% to 19% year over year and revenue to grow between 10% and 12% year over year.
In short, the quarterly results and management's guidance highlight how resilient Intuit's business model is and able to deliver strong growth (as well as provide management visibility for more growth ahead) even during uncertain times.
Intuit stock: Buy, sell, or hold?
With Intuit's business firing on all cylinders, the stock arguably lives up to its current valuation. Adding to the bull case, consider that analysts, on average, currently expect Intuit's adjusted earnings per share to increase at a compound average growth rate of about 15% over the next five years.
But just because the stock lives up to its valuation, it doesn't mean it's a buy. Investors should try to buy shares when they are trading at a discount to an estimate of their fair value. A meaningful margin of safety gives investors some room for error in their approximation of a stock's intrinsic value.
With all of this said, the tech stock looks more like a hold than a buy. This means investors on the sidelines may want to wait to see if they can get a better entry point before buying shares. Current shareholders, on the other hand, may want to hold the stock for the long term.
Fortunately, even if the stock doesn't provide shareholders with exceptional returns in the coming years, Intuit does pay a dividend, which it is in the habit of increasing every year (last year, it increased it by 15%). This cash payout makes the stock worth holding, despite shares appearing to be fairly valued.
