Why I Am Trimming Intuit
Hi reader,
As you might have imagined base on the title, I am trimming my Intuit position today. I thought that sharing my reasoning in a brief article would be a good idea. I rarely sell or trim positions unless something has gone fundamentally wrong (I’ve only sold Five Below and trimmed Adobe), but I believe it’s the right thing to do with Intuit. The first thing I would like to make clear is that this is purely a trim based on valuation, not a trim related to the recent news we’ve seen. I will explain this news and why I don’t think they impact Intuit that much and then will discuss the valuation briefly.
Let me first contextualize the company’s recent drop.
Contextualizing Intuit’s recent drop
Many of you might have seen that Intuit’s stock dropped quite considerably on Tuesday:
Before going into the reasons that might have caused this drop, it’s worth noting that the company is still hovering relatively close to ATHs:
Pinpointing the exact reason behind this drop is pretty much impossible, but I believe two things contributed to the decline:
Rumors about Elon Musk potentially working on an app through which people could file their taxes
The following tweet by the newly created ‘Department of Government Efficiency’
According to the DOGE, the tax code has become too complex and needs to be simplified. A more simplified tax code should theoretically reduce demand for assisted and DIY tax filing software, which would obviously not be great for Intuit’s tax business. Intuit is much more than tax, but there’s no denying that the tax part of the business is still significant at 29% of revenue and 34% of EBIT (excluding corporate charges).
Now, I don’t think any of these things are material for Intuit’s tax business, and they are not the reason for my trim. As I’ve discussed throughout my articles, Intuit’s tax advantage spans beyond the population's lack of access to free tax filing software. For starters, the US government will never be incentivized to help citizens save taxes, which is precisely what most citizens wish to do. We’ve had free tax filing in Spain for many years, and the only thing you can find on the platform is your salary and the taxes you owe based on that salary. It works well for simple filers, but it does not solve any problem for complex filers, as they would still have no confidence or knowledge about their tax deductions. To this, we must add the complexity of the US with federal and state taxes (something we do not have in Spain). This seems like a solution at the federal level.
Intuit saw this coming and has since diversified to assisted categories where complex filers are prevalent. Note that, due to higher ASPs, you don’t need the same amount of complex filers to compensate for the “lost” simple filers. Turbotax Live already makes up around 30% of Intuit’s total tax revenue.
An added diversification strategy Intuit is pursuing comes from business tax, which is expected to become a significant growth driver going forward. Business tax is less of a focus for the Government.
Another thing worth noting relates to the chart the DOGE shares above. Comparing the words in today’s tax code with those of 1955 makes little sense. The world is much more complex today, and it’s normal to see the tax code evolve to capture this complexity. To what extent the tax code has become more/less complex than necessary is something that can’t be precisely known. Tax codes have also become more complex because intelligent people have found ways to reduce their taxes payable, and governments around the world have enacted tax laws to close these loopholes.
Could the DOGE potentially reduce the amount of words in the tax code? For sure, but there’s a very big difference between reducing the number of words and everyone automatically becoming a simple filer. This is, based on the comments to that tweet, what most people think will happen (I strongly disagree).