There are three main ways to invest in the cloud. One way is to invest in the infrastructural plays that help to create it. Another is to buy companies whose internal operations are benefiting from utilizing the cloud. The third option is to invest in software companies that are shifting into selling software as a service, or SaaS. The poster boy of the last option is Intuit . It's time to take a close look.
Intuit's two key growth drivers
Intuit's stock is peculiar because it has its very own trading dynamic. Most of its profit is made during the all-important tax season. Subsequently, investors are mainly focused on its tax software's fortunes during the spring quarter.
After the tax season quarter, the attention turns toward its small business group (SBG) offerings. Attention shifts back once the tax season comes around again. Intuit isn't just about taxes, though.
In fact, in its last fiscal year, consumer tax only contributed 45% of full-year revenues. Furthermore, its guidance for 2014 implies that Consumer tax (consumer group) and pro tax will only make up 49% of revenue. Moreover its tax operations are only growing in low single-digits while, the SBG's growth is in the more impressive low-teens range.
Source: Company presentations.
Moving into 2014, Foolish investors should be focused on two things with Intuit. First of all, they should look at its plans to ensure a solid tax return season. Secondly, they should watch the ongoing development of an ecosystem within its SBG.
Intuit's disappointing 2012 tax season
Unfortunately, Intuit's last tax season was somewhat disappointing for a number of reasons:
Overall tax returns were lower than its internal expectations due to a difficult tax season
The software category overall only took a 1% share from manual, when Intuit had expected 2%
Intuit didn't grow its online market share as expected, and smaller competitors took market share
Intuit's rival, H&R Block , also confirmed that the tax season was uniquely difficult this year:
"We expected... ...the season would normalize to historical growth rates of 1% to 2%... ...we had little reason to believe that growth levels this year would be different than average historical levels.
Instead, at season's end, IRS returns were down approximately 1%, a result no one was expecting."
In addition, investors in Intuit and H&R Block have some cause for concern in 2014. According to Intuit's management, the IRS is talking about "some delays to the start of tax season again this year." While this is likely to be a timing issue, there is a danger that it could indicate a more complex tax season.
Intuit is making some changes to its tax strategy this year. The company is trying to move away from heavy advertising during the tax season, and more toward simplifying its products and ensuring customer retention. This sort of strategy is very much in line with the advantages of SaaS. In other words, SaaS solutions help to reduce customer churn because they tend to involve more of an ongoing interaction than a one-off software sale does.
Intuit develops an ecosystem
Its second major strategic focus is to develop an ecosystem around its various offerings in its SBG segment. The idea is use the cloud in order to cross-sell its financial management, payment, and employee management solutions (which make up the SBG and account for 37% of segment profits.) Furthermore, its tax refund customers can plan how to utilize their refunds by using the lower end of Intuit's accounting and financial planning software, QuickBooks.
QuickBooks is also undergoing a refresh which is being rolled out to existing QuickBooks online and desktop publishers. Again, a big part of the plan is to encourage its desktop customers to convert to its online offering. Intuit outlined that it now had over 500,000 QuickBooks online subscribers, up by 29% from the previous quarter. This provides more power to Intuit's ecosystem.
A competitive market
One downside to all of this is that Intuit's markets are getting ever more competitive. Paychex has recently launched an online accountancy offering targeted at small business. While this a relatively late move, it still represents the principle of moving to the cloud in order to cross-fertilize its payroll and HR services. Automatic Data Processing's also competes with both companies in online payroll, and its Vantage product is a cloud-based suite designed to integrate ADP's human resources, payroll services, and benefits administration in one package.
The bottom line
Intuit is facing stiffer competition, but it's an early mover in offering SaaS-based solutions. It's also being aggressive about developing its ecosystem, and it remains a prodigious generator of cash flows for investors. For example, Intuit generated $1.24 billion in free-cash flow last year, representing around 5.8% of its market cap. With analysts forecasting 11% EPS growth for the next couple of years, Intuit looks like a good value.
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The article The Cloud's Poster Boy Stock originally appeared on Fool.com.
Lee Samaha owns shares of Intuit. The Motley Fool recommends Automatic Data Processing, Intuit, and Paychex. The Motley Fool owns shares of Intuit and Paychex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.