After Intuit ( INTU ) announced that it had launched an AI partnership with Anthropic, it was clear that the deal would be positive for INTU and that Wall Street was happy with the deal. However, given the current turmoil in the Street regarding software stocks, the significant threat that AI poses to Intuit over the long term, and the fact that INTU stock is still not particularly cheap, the shares should be sold at this point.
Based in Mountain View, California, Intuit specializes in providing accounting and tax preparation software to businesses and consumers. Changing hands at a forward price-earnings ratio of 24 times, the stock has a market capitalization of $109.75 billion.
As of the morning of February 27, shares have fallen 20.6% over the past month, while they have retreated 37.5% over the past three months.
In the company’s fiscal second quarter that ended in January, its revenue rose 17% year-over-year to $4.7 billion, while its operating income rose 44% year-over-year (YoY) to $855 million.
Under the agreement, Intuit will look to provide AI agents to mid-sized businesses. In addition, Intuit customers will use Anthropic’s technology to build their own AI agents, and Intuit’s software will be migrated to Anthropic’s offerings.
The deal is positive for Intuit, if for no other reason than that the deal will likely, in the short to medium term, prevent Anthropic from aggressively taking market share from INTU, as the AI startup is doing with other software developers. Additionally, the deal will likely be positive for the Intuit brand, as Anthropic seems to be gaining an image as an AI powerhouse. And finally, given Anthropic’s extensive experience with AI agents, the deal should really help Intuit build meaningfully more effective AI agents.
Meanwhile, the Street seemed happy about the arrangement, as INTU stock rose from $359.55 on February 23, the day before the transaction was announced, to $394.42 by the market close on February 26.
Finally, there are several reasons why Street’s concerns about AI supplanting software companies are probably exaggerated.
First, AI requires large amounts of data to function. In fact, according to one study, “42% of enterprises need access to eight or more data sources to successfully deploy AI agents.” Another publication noted that “AI agents are only as good as the data they are trained on.” Furthermore, agents do not need just any information; They need the “right data”. As a result, for years Anthropic and its competitors will probably have trouble getting enough data to ensure that the results of their agents are always or almost always accurate. In fact, AI systems are sometimes known to rely on inaccurate data.
A point related to the previous issue is that certainly in the near to medium term, many companies will not feel as comfortable relying on AI agents as they have on the software they have used for decades. However, people have not been aware of AI agents for a long time, and as I mentioned above, they have been known to occasionally make mistakes.
In light of these facts, I don’t expect Intuit’s business to be disrupted for at least a few years.
One concept I’ve learned over the years is that it takes a very long time for most people on the road to let go of their misconceptions. For example, it took almost all of 2022 and 2023 for many investors and analysts to internalize the idea that rising interest rates won’t trigger a nasty recession, and despite all of Tesla’s (TSLA) problems and struggles, its value is still high.
Therefore, even if there is no substantial evidence to support the “all software companies will be destroyed soon” theory that has taken the road, it could easily take a year or two for Intuit and its peers.
But on the other hand, in two or three years, after Anthropic and other AI companies have had time to improve their agents and gain access to more data, they could pose a huge threat to Intuit and many other software companies.
Intuit isn’t very cheap, as shares change hands at a forward price-earnings ratio of 24 times.
Given this point, along with the two threats I described above, I recommend selling INTU stock.
As of the date of publication, Larry Ramer had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
