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Mitek Systems, Inc. (NASDAQ:MITK) - One Pager
"An Overlooked Growth Stock"
This write up / one-pager was done in collaboration with Inbox Alpha.
100% of the research was done by Inbox Alpha, I just added couple of final touches.
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Mitek Systems, Inc. MITK 0.00%↑ is a growth company disguised as a value stock. It’s got some hair on it, with two existential threats to its business and stock price – one of which is quickly being resolved. But because of this it’s trading at ~11-12x FCF, while growing its top line at ~20%, generating ROEs of 15-20%, and seeing a sustained trend of increasing margins.
The company has two primary businesses: (1) the legacy Mobile Deposits business and (2) the newer ID Verification business. Roughly 60% of its revenue is generated by the Mobile Deposits segment, with the remaining 40% coming from ID Verification. The Mobile Deposit business essentially allows Mitek to earn a royalty on every check deposited over a banking mobile app in the U.S. It generates gross margins well above 90% and presumably generates all of Mitek’s FCF.
Through its Mobile Deposit business, Mitek serves 7,500 banks and financial institutions by providing the technology that allows them to accept physical checks via photograph through their mobile apps. Mitek essentially has a monopoly on these deposits – USAA is the only competitor, and its position is negligible. Banks typically purchase physical check deposit “inventory” up front, and credit Mitek as each check is deposited – meaning Mitek typically gets its revenue up-front. In addition to this, Mitek provides other services like check image capture and verification technology as well as its Check Fraud Defender product, which protects against fraudulent check transactions.
The Mobile Deposit business has grown by around 20% for the last decade or so. And while the last few years have seen slowing growth, Mitek has had sort-of a resurgence with 59% YOY growth in Q1 2023 (albeit primarily the result of a one-time transaction). While the Mobile Deposit business can basically run on autopilot today, there are signs that it will eventually disappear. Think about it, how long will physical checks be around? Mitek should benefit from the ever-increasing movement towards digital deposits from in-person check deposits, but at some point physical checks will probably be phased out completely. Today, they only make up ~6.7% of total non-cash transactions in the U.S., and 93% of the workforce is already paid through direct deposit.
Mitek is combating this by investing in and growing its ID Verification business. Through this segment, Mitek offers its corporate customers AI-backed biometric verification services. Essentially Mitek allows companies to verify documents submitted by customers, customers’ facial features, and their voices. This is used by financial institutions to meet KYC/AML regulations (a big growth area for Mitek considering they already have over 7,500 banking customers) and by other tech-based platforms to verify users as well as offer users verification services (Mitek’s channel partners). They count as customers tech companies such as Airbnb, DocuSign, Adobe, and Turo.
Mitek’s ID Verification business has grown at over 30% annually since it was started in 2015, and the market it’s going after is large and growing fast. But it’s had its issues. It’s currently unprofitable, though management expects it to be breakeven by 2024. And while the ID Verification segment has grown through several successful acquisitions, Mitek has had to completely write-off a $48.9 million acquisition made in 2018.
On top of this, the ID Verification segment has seen slowing revenue growth in Q1 2023 (~15% YOY), and revenue growth is expected to slow for FY 2023 as well. It also looks like there’s going to be a lot more competition in the ID Verification business (though Mitek’s sticky Mobile Deposit customer base will help) than the Mobile Deposit business. Combine this with Mitek’s two other major problems, and you have a depressed stock, even with long-term growth opportunities in ID Verification coming from significant demand for AI-based fraud detection and online counterparty verification (think signing documents online without a notary when verification is required).
Mitek’s two largest issues are the Nasdaq delisting notice and the USAA litigation. Mitek just recently filed its 2022 10-K in August 2023 and filed its Q1 2023 10-Q at the beginning of September. Its filings with the SEC have been significantly delayed, so much so that the Nasdaq threatened to delist it. Fortunately, Mitek has worked out a deal and has agreed to get its filings up to-date by mid-October to maintain its listing, which it is well on its way to doing.
The USAA litigation is a little harder to figure out. Basically, USAA has been suing Mitek competitors saying their use of mobile deposit features violates USAA patents. It hasn’t specifically brought a suit against Mitek or even said that their technology is the problem, but it’s implied by every lawsuit. In addition, some Mitek customers have sent Mitek indemnification letters (essentially asking Mitek to reimburse them for anything they owe to USAA). This is all pretty scary when you realize that USAA has been consistently winning these lawsuits, getting jury verdicts in the hundreds of millions from customers like Bank of America.
Mitek has brought a declaratory judgment action against USAA, asking a court to find that it does not infringe any USAA patents. USAA, content to continue its campaigns against large banks, has been fighting the lawsuit, first getting it transferred to the Eastern District of Texas then dismissed in 2022. After an appellate court remanded the case, it has once again been dismissed by the Eastern District of Texas, making Mitek’s efforts seem less and less likely to succeed. At the moment, though, Mitek has not incurred any liability itself, even as USAA continues suing its customers.
All that being said, Mitek still has some good long-term opportunities ahead of it and, because of its valuation, can generate good returns for investors even if it only grows by 15% a year going forward. Traditionally, Mitek has diluted shareholders at a pretty steady rate of ~6% a year. This would obviously eat into returns if it’s continued in the future, but there’s some hope that it will be abated considering Mitek bought back roughly $15 million worth of stock in 2022 (though I will note that this was mainly just a cash expense offsetting dilution – not ideal).
Overall, though, the company has impressive long-term growth opportunities and the possibility to grow at a much faster rate than 15% annually. It offers exposure to the hot AI market theme as well as exposure to the AI fraud prevention market, which (though very hard to predict) looks like it will be huge. The company is in a pretty good spot, as it stands, supported by its monopoly-like position in the (still growing) Mobile Deposit business, fixing its SEC filing issues, currently not retaining any liability in the USAA litigation, and investing in its ID Verification business.
If you enjoyed this, Inbox Alpha has a much deep dive into Mitek Systems on their website, click here to check it out (its 32 pages long!)
At the time of this publication, both Inbox Alpha and YZ own shares in Mitek Systems, Inc. MITK 0.00%↑
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