In just ten months, the stock price of leading financial software company Intuit collapsed from over $813 to barely above $300 per share. That 63% crash has been largely attributed to fears that generative AI is going to disrupt software businesses of all kinds. Fundamentally speaking, we think the market is throwing the baby out with the bathwater here. Revenue is expected to climb by another 13.5% this year, accompanied by an even bigger rise in earnings per share thanks to Intuit’s buybacks.
Alas, people have been calling this sell-off an overreaction since the price was around $600. This didn’t prevent the market from erasing another 50% of the company’s market cap. Fundamental analysis can help investors spot the high-quality asset among the many mediocre ones. To see if the price is approaching the bottom, however, we prefer to look for Elliott Wave patterns.
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The daily chart of Intuit reveals that the sideways movement since the top in late-2021, which includes two notable declines and a new record high in between, can be seen as an expanding flat correction. The pattern is marked A-B-C and the first two waves have the necessary three-wave structure, while the third one is a five-wave impulse. The impulsive structure of both waves (a) are also visible and wave 4 of (a) of B is a triangle.
Wave C could still make new lows in wave (5), but if this count is correct, the bottom must be near for Intuit stock. According to the theory, once a correction is over the preceding trend resumes. Here, Intuit was obviously in an uptrend prior to 2021, so it makes sense to expect a bullish reversal soon. Given that the stock is also far from expensive and the company keeps growing sales at double-digit rates, we think that expecting new records in a few years is not like chasing a pie in the sky.
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Disclosure: The author holds a long position in Intuit stock in the EWM Interactive Portfolio.
