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Morningstar | Intuit's Wide Moat Is Underpinned by High Switching Costs and Positive Network Effects

Intuit aims to be the operating system behind small businesses. The company has an entrenched market-leading position in self-prepared tax and small- to midsize-business accounting software. We think the firm has been able to carve out a wide economic moat. Key to the company's success have been the inherent switching costs and network effects associated with its software. Shifting to alternative software costs customers the time and effort required to learn a new product, additional training costs, operational disruption, and the risk of transferring business-critical data. Moreover, Intuit has strengthened the stickiness of this relationship by skillfully intertwining the functionality of its multiple products, such as payroll, making users more likely to adopt additional products as their needs expand. As a result, we expect returns on invested capital to remain significantly above the company's cost of capital over the long term.The company's size hasn't hindered its growth, and there is room to expand, in our opinion. We are encouraged by growth in the QuickBooks Online ecosystem and think it will anchor the company's push to becoming the operating system behind small businesses globally. We believe Intuit's shift to a cloud-based model makes it easier for product add-ons, and we think further adoption of payroll and payments offers good growth potential. In addition, the relatively low-price points and widespread use of the company's accounting products leave Intuit well positioned to expand in tandem with the growth of net new global SMBs and self-employed operators.Although the company's growth potential in the tax segment is somewhat limited by the inherently slow increase of the individual tax return base, Intuit has steadily captured a growing share of the overall tax return market as the number of self-prepared tax returns filed electronically has expanded, leading to a consistent TurboTax revenue growth rate. Unless Intuit stumbles badly, it will be hard for traditional tax-preparation companies to encroach upon its approximately 65% share in the software category and roughly 33% share in the professional tax category.