Automation And Digital Shifts Will Erode Traditional Tax Services

Key Takeaways

• Automation, digital adoption, and demographic shifts are eroding H&R Block's assisted tax prep and retail models, threatening client retention and compressing margins.
  
• Struggles to diversify beyond seasonal tax revenue and rising fintech competition expose earnings to volatility and diminishing future profitability.
  
• Expansion into higher-value client segments, digital upgrades, and diversified small business and banking services are driving higher margins, stable earnings, and enhanced shareholder returns.

Catalysts

Through its subsidiaries, 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.

• Rapid automation and artificial intelligence advances in tax processing are expected to reduce demand for assisted tax preparation over the coming years, directly threatening H&R Block's core revenue streams and potentially accelerating client attrition among basic and moderate-complexity filers. This trend is likely to put sustained pressure on top-line revenue growth as both individual and small business customers migrate to lower-cost, self-service or fully automated solutions.
  
• The continued preference for digital-first experiences, especially among younger, tech-savvy users, poses a long-term risk to H&R Block's brick-and-mortar retail model. This shift is expected to lead to incremental declines in foot traffic and higher customer churn, while increasing the burden of fixed retail costs relative to shrinking physical volumes and compressing net margins.
  
• Demographic changes, with older tax prep clients aging out and a growing cohort of digital-native younger filers, are set to accelerate the erosion of H&R Block's legacy customer base. This will likely hinder the company's ability to grow or even maintain filing volumes in both its Assisted and DIY business segments, ultimately weighing on future revenue and earnings potential.
  
• H&R Block's ongoing challenges in meaningfully diversifying beyond highly seasonal tax revenues, along with a limited track record of extracting significant recurring revenue from adjacent financial products like Spruce, leave its future income streams more volatile and its earnings quality low-especially as it faces intensifying competition from agile fintech and direct-to-consumer platforms.
  
• The possibility of tax code simplification and the expansion of government-sponsored pre-filled tax returns remains a mounting threat that could drastically reduce the need for professional tax preparation, shrinking the addressable market and undermining H&R Block's long-term business model and profitability.

H&R Block Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on H&R Block compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming H&R Block's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.2% today to 15.6% in 3 years time.
• The bearish analysts expect earnings to reach $642.5 million (and earnings per share of $5.31) by about August 2028, up from $565.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 11.9x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.1x.
• Analysts expect the number of shares outstanding to decline by 4.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

H&R Block Future Earnings Per Share Growth

Risks

• H&R Block is successfully expanding into higher-value, more complex client segments-particularly among higher-income filers and small businesses-which tend to offer higher margins and greater loyalty, supporting revenue and net margin improvement over time.
  
• The company's digital transformation efforts, including continual upgrades to its DIY platforms with AI-driven tools, and the MyBlock mobile app, are increasing client conversion rates and operational efficiency, thereby supporting higher client retention and improved net margins.
  
• Small business services, including bookkeeping, payroll, and digital SaaS offerings through products like Wave, continue to deliver double-digit top line growth, broadening H&R Block's revenue sources beyond the seasonality of tax filing and improving overall earnings stability.
  
• The Spruce mobile banking platform is attracting recurring, non-tax deposits and driving engagement year-round, which helps diversify revenue streams and reduce reliance on the core tax business, strengthening cash flow and supporting future profit growth.
  
• Capital allocation discipline, highlighted by consistent dividend increases, opportunistic share repurchases, and strategic franchise acquisitions at attractive EBITDA multiples, demonstrates sustained free cash flow production and a commitment to shareholder returns, supporting long-term earnings per share growth.

Valuation

• The assumed bearish price target for H&R Block is $48.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of H&R Block's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $48.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.1 billion, earnings will come to $642.5 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $50.15, the bearish analyst price target of $48.0 is 4.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.