2023-04-04 14:04:37 ET
Summary
- Clear Secure provides retinal scanning terminals at airports and other venues, which allow travelers to spend much less time going through security.
- Clear Secure's business took a hit during the pandemic, but the company has come back in force and is growing revenues well.
- While not profitable, the firm does have positive free cash flows and its financials heartily indicate that it is doubling down on growth.
- It is trading at a relatively cheap operating cash flow valuation and is well-positioned to take advantage of the ongoing resurgence in air travel; as such, I am calling it a buy.
Overview
Clear Secure ( YOU ) is a biometric security company. Their core offering is a retinal scanner that is deployed across airports. This allows travelers to confirm their identity and spend significantly less time going through standard security procedures. You may have seen one of their scanners at large airports previously:
At present, Clear Secure is operating exclusively within the contiguous United States.
The company is also in the early stages of distributing its service to other types of locations, namely stadiums and other large-scale venues. This initiative is much more nascent than their core airport distribution network.
While having been in business since 2010, the company is a recent entrant into the public markets. It listed itself publicly in Q2 of 2021 and has underperformed both the S&P 500 and NASDAQ indices since then. The stock came within a hair of the NASDAQ Composite in late 2022 and early 2023 but has since depreciated even while the NASDAQ moved up somewhat. At its current share price of $26.61 as of this article, it is trading at a 14.2% discount to its IPO price of $31 per share. This article will review Clear Secure's financials to see if its price performance has been warranted and if it may be worth picking up shares at present.
Financials
Revenue growth for Clear Secure took a hit during the pandemic era owing to significantly lower airport travel numbers. Given how significant the decrease was, however, these numbers aren't as bad as I would have assumed. This is likely due to Clear Secure's product being targeted towards - and mostly used by - frequent flyers such as businesspeople.
The company was able to handedly return to growth in Q3 of 2021 and has since seen revenues increase significantly. Gross margin has been relatively variable, although quite high overall, as the firm continues to expand its hardware network.
As to profitability, Clear Secure appears to be trending in the other direction. The caveat here is that the firm was provably profitable at lower revenue figures. The lack of profitability that we have now seen for 6 quarters running must then be chalked up to some combination of two factors: cost pressures or growth expenditures.
Indeed, it does appear that Clear Secure has been spending heavily on operating expenses. This number is also quite variable but should not be considered low by any measure; it has been coming in at somewhere between 75% and 125% for 2 years. This certainly isn't sustainable. While R&D costs have gone up, this appears to have been primarily spent on Sales & Marketing. Since the company is still saturating its target market, I wouldn't read too far into this. Additionally, we must keep in mind the nature of their business model. Once scanning terminals are set up, they're there to stay. They then continue to generate revenues for the company while simply being maintained. This is a sticky 'add on' business model that can perhaps be compared to how razor blades work; you buy the blade, and then you continue coughing up for replacements. As such, I don't see these figures as a major concern.
We can corroborate that this is what's going on by looking at capital expenditures, which are relatively low and consistent. This would be the hardware spend for the actual scanners. The real money is being spent on bringing these to market. Again, I think it's all well and good given that revenue is still growing at a brisk clip.
Looking further down the cash flow statement, things start to get interesting. While unprofitable, this company is actually generating positive free cash flow. This confirms my belief that it is expending to grow rather than struggling to get profitable. This company is choosing to funnel money back into itself - management has its foot on the gas. We can also see that per share cash flows are their highest since the company became public. While I don't think the company is at the point to start yielding a linear, steady, increase in its cash flows, these two metrics nonetheless give me a lot more confidence in its operating model.
To round out this analysis, we can take a quick look at the balance sheet. A point worth noting here is the fact that this company still has material share-based compensation, evidenced by its ongoing growth in common shares outstanding. This will constitute a persistent dilutive effect on shareholders. Since going public, this company's total shares outstanding are up 17.6%. While this is common in the technology sector, I would like to see this go down into the single digits sooner rather than later.
Additionally, the company has also taken on $110M in new debt as of the last quarter in order to continue growth. Since this is very much a hardware company, it has maintained a positive net debt in the face of this; I don't see this number as overly burdensome at present; it has plenty of cash on hand and a seemingly robust capital structure.
The valuation side of things here is relatively interesting. While trading at a significant premium on a sales basis, this company is actually priced at a nice discount on trailing operating cash flow - nearly 32% compared to the overall IT sector. Since rising rates have now put us into a much more cash-centric market, I actually see this as a positive for investors looking to get into the stock.
Conclusion
Overall, I like what I see with this stock. It has growing revenues, positive cash flows, and a balance sheet that doesn't raise eyebrows. It also seems to have recaptured its momentum quite well after the pandemic period, during which it also appeared to be more robust than I would have initially expected. Furthermore, I like the business model as it generates very healthy margins after seeing its hardware get installed.
We should also consider where things stand from a secular perspective. Now that the pandemic has ended in earnest, and lockdowns have likely gone away for good, travel is back. This summer should see the highest rates of air travel that we have seen for a while. Clear Secure's management appears to be setting itself up for success during this critical juncture, and I would venture that they are well-positioned to do so. Considering all of this and the relatively cheap operating cash flow valuation, I'm calling it a buy.
For further details see:
Clear Secure: Hardware/Software Biometric Play With Revenue Momentum