INTU

Intuit

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-$157.73 -28.84%
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Sept Idea Comp - Rocket Companies $RKT
Interest rates for mortgages are above 6%. Mortgage demand falls to a new 22-year low, according to Forbes. Home sales dropped 19% in July.
Why would anyone be buying shares of mortgage companies when this is the current environment of the real estate market?
Interestingly, it's the insiders of $RKT that are buying the dip. And in this memo, I will explain the possible reasons why insiders are bullish on Rocket and why this company is a great investment.
First, Rocket's business structure has been starting to look more like a bank than an internet startup.
Over the past few years, Rocket has been filling its balance sheets with mortgages that it originates. Before, it would sell its mortgages to Fannie Mae or Freddie Mac for securitization. Now, it's starting to hold onto those loans and reaping the cash flow from it.
And with mortgage payments surging throughout 2022, Rocket is seeing its inflation skyrocket along with it.

Insiders know that with surging mortgage payments, $RKT will have a lower impact on its revenues. Loan origination volume is down but at least the loans that they originate and hold will provide them with cash flow during these hard times.
Another thing is that Rocket is leading the consolidation of the home mortgage industry. The home mortgage industry is highly fragmented with many mom-and-pop shops. As Rocket gains more market share, the company will see higher profits overall and have more power over its industry.

In this slide, we can see that Rocket Mortgage has less than 10% of the mortgage market. When compared to other companies like $SCHW $AMZN $INTU and $BKNG, all who lead the consolidation of their own industries, Rocket could reap a similar level of fortune as those other companies if it can gain a similar percentage of market share as those industry leaders.

And based on the growth of Rocket's market share in the mortgage market, I am confident that the company can reach its targeted threshold of above 20% market share.
When a company gains market share, if they're not efficient, then it can lose its gains to a competitor that's more efficient. According to Rocket, they're way more efficient than the average mortgage company. As their loan volumes have grown over the past several years, they've shown success in scaling their business. This is proven by the number of loans per production team member per month metric (below).

Outside of mortgages, Rocket has a personal finance app that they obtained through its acquisition of Truebill. The best part about this business is that its annual recurring revenue (ARR) is over $100 million. Like the mortgages it holds, Rocket's premium membership plan for its personal finance app is also bringing more recurring revenue to the business. Investors love recurring revenue business whether times are good or bad.

Rocket has other business lines too, like providing auto and solar loans. There are many cross-selling opportunities for the company. While most of these non-mortgage businesses are small, over time, they will grow into something bigger.

But for now, let's appreciate that Rocket owns the entire home buying process. More money comes to them and little to no money goes to third parties when people buy a home through Rocket.

Conclusion
In sum, I believe that the:
  • large and consistent cluster insider buying
  • gains in market share
  • high efficiency
  • management's efforts to diversify revenues outside of mortgage origination
  • loans on Rocket's books
Rocket will create immense value for investors. While times are tough for the real estate market, Rocket has a strong balance sheet (current ratio of 5.03) that can help the company weather the tough times.
It's possible that Rocket will capitalize on these tough times to acquire its competitors at a lower price and acquire more market share from there. A contrarian move like that could be another reason why insiders continue to buy every dip in this stock.

Or maybe insiders simply like buying a great business at a great price.
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Leandro's avatar
$130.9m follower assets
What makes a product/service compelling from an investment POV?
Products where price is secondary for customers exhibit pricing power and high retention

In the context of business management software (such as $INTU's QBs), there's too much hassle to go through to justify a change due to price unless competing software is much much better

Pricing power and high retention is further strengthened if a product makes up a small part of a customer's overall costs.

There will be other places where customers will look to cut costs:

It all boils down to how mission-critical a product is and how much it costs to the customer as a proportion of total costs

This is what, for example, Constellation Software $CNSWF goes after when investing in VMS software.

Can you think of any other examples? Let me know in the comments!

Btw, images above are from AlphaSense, a platform for expert calls. You can sign up for a free trial (a work email of some sort is required, but no credit card) and download all the transcripts you want, in the following link.
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Your question brings to mind Motley Fool co-founder David Gardner's "snap test." To paraphrase: if I snapped my fingers and a company/product disappeared from the face of the earth, how many people would notice? How many people would care? In $AAPL's case--a bunch! $PTON though? Not so much. In terms of business softwares, a lot of businesses would probably be affected if $PAYC, $DDOG, $CRWD disappeared. For something like $MDB the answer isn't quite clear yet.
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Leandro's avatar
$130.9m follower assets
What kills large companies
Yesterday I read the following article from 1993 called "Dinosaurs" which basically versed about how (and why) large companies fail

"The normal and ruinous problems of success, so it is contended, are complacency and size."

Then I remembered reading the following in an expert call from an $INTU former employee

They basically talk about how Intuit is so good at executing and moving fast.

Of course, $INTU is a pretty large company, so how are they able to pivot so fast?

The expert then shared that the key was in the infrastructure. $INTU made a decision some years ago to tailor its infrastructure to an agile organization, and that's paying off now.

When looking at a large organization, flexibility and awareness of rising competition is key. Disruptors tend to move faster and can end up eroding strong moats, specially in tech.

No large company wants to be the next Sears, but many will eventually end up that way.

Btw, if you want to have access to expert calls to gain an "insider edge", AlphaSense has a two-week free trial (no CC required) where you can download as many transcripts as you want

You can access the free trial with this link!
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Excellent article Leandro! I personally love to use a boat analogy to describe this problem of the lack of agility in big companies: they’re like a tanker ship that has immense force but little ability to change course. Young startups on the other hand are like speed boats, agile and and can turn on a dime.
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Erick Mokaya's avatar
$102.2m follower assets
Leandro's avatar
$130.9m follower assets
Intuit's Q4 and FY 2022 Earnings
$INTU is believed to have a lot of macro exposure, but I differ. In my opinion the company has a large chunk of revenue that might prove to be resilient in an adverse macro environment.

I go over this and the most recent earnings in the following article. Hope you enjoy!
Nice recap! I like management's confidence. $INTU's tools are critical to its customers and regardless of the macro environment taxes and accounting needs are here to stay.
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Erick Mokaya's avatar
$102.2m follower assets
In our newsletter this week:
🏦Takeaways from Jackson Hole symposium
💳Credit card delinquency rates up slightly
🎮A sharp slowdown in gaming revenue at $NVDA


Probably single thing I like most is their product dev. philosophy, ie lean startup style experimentation, iteration, and optimisation etc. I think this helps them defend high market share in competitive markets.
Financially, they have high free cash flow conversion and high ROIC, alongside a decent growth strategy.
Just find it hard to buy right now given valuation. On my numbers they’ll only offer a ~1% div yield next few years, unless they up the payout ratio. If they do that could be an interesting angle
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Earnings this week
Earnings reports I’m interested in this week:

Tue: $INTU
Wed: $CRM $NVDA

I’m curious to see how Salesforce is doing in this macro environment.
NVIDIA has some explaining to do regarding their recent pre-announced weaker-than-expected quarterly revenue.

Which companies are you looking at?
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