Tax-Prep Analyst Sees More Free Filers Hampering Revenue Growth

(Bloomberg) -- Tax-preparation software companies face headwinds for the revenue they get from each tax return this year due to the combined effect of a rising mix of free filings and lower need for services that assist do-it-yourself filers, according to Morgan Stanley.

“A simplified tax code and greater free file scrutiny likely pushes the mix of ‘free’ returns higher in ’20,” analyst Keith Weiss said in a research note. “Despite this dynamic, tax vendors may still be able to sustain growth into 2020 by monetizing more effectively on add-on paid service offerings.”

Morgan Stanley expects Intuit Inc. to hit the high end of its implied consumer tax guidance as TurboTax continues to gain market share. For H&R Block Inc., which is historically known for in-person professional assisted filings, growth will likely be at the low end amid declining year-over-year volume in assisted tax returns, Weiss wrote.

Read more: H&R Block May Slip as BTIG Says Intuit’s Spending ‘Bodes Ill’

Still, in the case that H&R Block sees a modest improvement in assisted volumes, the stock might be a “relatively attractive short-term trade given recent sell-off,” he wrote.

The dimmer growth outlook for the broader sector comes after 2019 saw accelerated growth in the “assisted DIY” category as most consumers faced the first tax season affected by the U.S. tax law signed in late 2017.

Growth in the category, which includes products like Intuit’s TurboTax Live and H&R Block’s Ask a Tax Pro add-on, will likely slow this year “with confusion from the first year of the new tax law change in the rear view mirror,” Weiss wrote.

Meanwhile, the U.S. Internal Revenue Service has been making changes to its Free File program after coming under scrutiny last year following news reports that companies in the program steered customers to paid services that should have been free.

Read more: Tax-Prep Changes Open Door for More Active IRS Role: JPMorgan

The program allows the IRS to partner with private tax software providers to offer free online tax preparation and electronic filing to individuals with incomes under $69,000.

Shares for both Intuit and H&R Block rose as much as 0.6% on Thursday. Over the past 12 months, Intuit has climbed 31% while H&R Block has fallen 8%.

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