Summary
- Mitek isn't a new company but the modern version of the business really began around 2007.
- Their legacy segment, image capture for mobile check deposits, isn't growing but is helping fund their other, higher growth segment.
- I feel confident that EPS will grow more over the next five years than the market expects.
Mitek Systems (MITK) is a software company that provides image capture technology as well as identity verification. The company has been public since the late 80’s but was in a very different line of business for many years. The current version began around 2007.
If you’ve ever made a mobile deposit with your bank by taking a picture of a check with your phone, then you’ve used MITK’s image capture technology. They hold a very high market share in this industry, over 95%, but the use of physical checks overall isn’t growing, so that part of the business isn’t poised for much growth.
They estimate the global TAM for verification at almost $16 billion, at growing at 16% CAGR for the next 5 years.
Below is the long-term share performance:
There aren’t really any peers to compare against in the image capture space simply because MITK has such an overwhelming market share over 95%. On the ID verification side, most competitors are private, and the public ones are very small market cap stocks. I’ve included two competitors below but it isn’t extremely useful due to the two segments MITK operates in.
Company | Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-Year ROIC | EPS 10-Year CAGR | FCF/Share 10-Year CAGR |
27.9% | 2.1% | 1.4% | n/a | 78.1% | |
2.5% | 3.6% | 3.6% | n/a | n/a | |
2.8% | -31.6% | -31.6% | n/a | n/a |
Currently it’s not very useful to look at ROIC. The MITK isn’t young as far as numerical age but it’s still a very small company with lots of growth ahead of it. So earnings are definitely not stable, and it's better to look at what kind of revenue, operating profit, and FCF are generated from invested capital. Below are TTM figures in USD millions:
Revenue | Operating Income | Free Cash Flow | Net Income | Long-Term Debt | Equity |
140 | 16.2 | 27 | 8 | 131 mil | 177 mil |
Capital Allocation
I don’t usually prefer companies that grow by dilution, but there will always be the cases where raising the funds through equity does add value. So far I like the use of capital for acquisitions. Growing the ID verification side of the business is being done largely through acquisition, and I think this is the right thing to do in this case.
They have used more debt lately, but the levels are low enough to not cause credit concerns. Moreover, I hope to see a shift towards more debt instead of raising equity for funding.
Risk
The monopoly in image capture is helping to fund the future of the ID verification side. The biggest risk is simply that the ID verification segment doesn’t grow or doesn’t become profitable in a reasonable amount of time. There may be some technological overlap between the two segments but dominating the first doesn’t guarantee the same will happen with the other.
Insider ownership is not that high for a company this size, a mere 3.4% for a company with a market cap of $446 million. This is something I would rather see more of but it’s not a major red flag. A bigger potential issue would be the delay in reporting their 10-K, which is never a great sign.
Another issue is the legal dispute between WFC and USAA. I don’t have any unique insight into how this will play out, but potential investors should be aware of it.
Valuation
First is the multiples comp, followed by the dcf model:
Company | EV/Sales | EV/EBITDA | EV/FCF | P/B |
MITK | 3.6 | 17.2 | 18.6 | 2.5 |
OSPN | 1.9 | -28.1 | -27.3 | 2.6 |
IDN | 2.3 | -8.7 | 2228.4 | 2.7 |
The multiples don’t tell us much, but on an intrinsic basis I do see the stock as being undervalued right now. There is still more uncertainty the farther out you look, but the company is executing fairly well in an increasingly important industry poised for more growth. I feel confident that EPS will grow faster than the market is currently assuming.
Conclusion
MITK has a virtual monopoly with its image capture segment, but this is an industry that is in secular decline over the long term. The good news is that this legacy segment is helping to fund ID verification, which is where the future of the business lies. So far they have diluted share in order to make acquisitions in the ID space and so far the strategy is working out.
I do hope that dilution stops sooner rather than later, and that debt can be used for most external funding needs in the future. Right now I like the prospects of this company for the next five years at the current price.
For further details see:
Mitek Systems: Undervalued Growth For Next 5 Years