We came across a bearish thesis on H&R Block Inc. (NYSE:HRB) on ValueInvestorsClub by JackBlack. In this article, we will summarize the bears’ thesis on HRB. The company’s shares were trading at $63.64 when this thesis was published, vs. the closing price of $53.09 on Jan 02.

HRB engages in the provision of assisted and do-it-yourself (DIY) tax return preparation services to the general public primarily in the United States, Canada, and Australia. The services are offered using retail outlets operated directly or through its franchisees along with desktop and mobile applications.

The biggest challenge that HRB faces is the loss in the number of filers using the Assisted channel where people directly visit the outlet and take help from an expert. This segment accounts for 85% of the tax-preparation revenue generated by HRB. The primary reasons for this decline are the aggressive pricing and resurgence of competitors like Jackson Hewitt.

The DIY channel posted 6.4% growth in 2023 and is expected to remain robust due to changing consumer preferences. The loss in share of its rival TurboTax has benefitted HRB since TurboTax has inflated the price by 44% in the last five years. The substitution effect due to TT’s pricing policy may no longer be sustainable since TT has clearly shown interest in regaining the lost market share by reviewing its pricing policy. There is also a potential for launching a new pricing tier that would compete directly with HRB. Moreover, the interface of TT appears superior to that offered by HRB.

HRB has been aggressively buying back its shares in the last one year and this is one of the reasons why the share has been able to remain afloat for most part of 2024. This is a contradiction to the strategy pursued by its senior executives. The CEO and CFO sold shares worth $12 million and $5 million respectively.

The current price reflects a valuation of 13x based on TTM EPS, much higher than the 7x valuation of Western Union, a company that offers a similar growth rate.  While 10x would be a more justified measure, it reflects a 25% downside for HRB.

While we acknowledge the potential of HRB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than HRB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.