Morgan Stanley downgrades Intuit amid pricing concerns

Investing.com - Morgan Stanley analysts downgraded Intuit Inc (NASDAQ:INTU) from "Overweight" to "Equal-weight" on Wednesday, citing concerns over the company's aggressive pricing strategy.

Accompanying the downgrade is a revised price target, lowered from $750 to $685, reflecting growing apprehension about Intuit's near-term growth prospects in key segments like TurboTax and QuickBooks.

Morgan Stanley's analysts noted that Intuit’s reliance on significant price increases may be contributing to market share losses, particularly in the TurboTax division. TurboTax has recently seen a decline in market share, which the analysts attribute partly to the company’s heightened pricing, reflecting a saturation in the DIY (do-it-yourself) market.

This loss in share poses a headwind amid Intuit's move into higher-margin segments, including Assisted and Business Tax.

Furthermore, the analysts noted that expectations for Small Business growth, driven by significant price hikes at QuickBooks, are high. This, combined with high margin expectations following recent headcount reductions, leaves Intuit with little room for error, balancing the risk/reward more precariously.

Despite these near-term challenges, Intuit has demonstrated strong performance over the past four years, with its stock outperforming the median large-cap software stock by more than 50%.

This outperformance was driven by a shift in focus to higher-value solutions and an upmarket transition, which contributed to a significant expansion in operating margins and EPS growth. However, the recent volatility from acquisitions like Credit Karma and Mailchimp poses additional risks.

Key Takeaways from Morgan Stanley

• TurboTax Market Share Losses: Intuit's strategy of pushing price increases has led to market share losses for TurboTax, especially in the DIY segment. This decline can be attributed to the saturation of the DIY market and increased prices outpacing customer willingness to pay.
• QuickBooks Price Increases: While QuickBooks has seen considerable price hikes (16% on average), investor expectations for high-teens growth leave little room for underperformance. The recent increases may lead to competitive pressures, particularly as QuickBooks' market-leading position faces new challenges.
• Balanced Risk/Reward: The company's current pricing strategy increases the risk of execution shortfalls. Intuit's premium valuation compared to its peers is less justified given the introduction of volatility from recent acquisitions and market share challenges.

Given these concerns, Morgan Stanley altered their valuation model, applying a 2.1x PEG ratio, slightly below the historical PEG of 2.2x. This revision results in a price target adjustment from $750 to $685, reflecting a more conservative outlook on Intuit's market position and growth durability.