Mitek Systems Stock: Identity Verification At Cheap Valuation (MITK)

Mitek Systems, Inc. (NASDAQ:MITK) operates in the identity verification systems industry, which currently grows at a double digit. Already with many clients from very different market verticals and technology, if internationalization and the merger integration of ID R&D are successful, in my view, the stock could be worth around $17.97 per share. I also see risks from lack of product and technological diversification and competition. With that, in my view, MITK appears undervalued by the market.

Mitek

Accompanying the modernization of industries and the daily life of people as well as security systems in access to personal data, Mitek Systems Inc is a company dedicated exclusively to the development and commercialization of identity verification systems through different channels such as the use of biometric fingerprints or identity verification through the use of artificial intelligence.

Although its solutions include different types of identification formats such as the collection of biometric data, identity readings through the registration of facial gestures, and deposits through mobile devices, the company currently unifies all these sections of development into a single business segment, in which it encompasses the development, sale, and provision of its identity recognition and cybersecurity services. This, on the one hand, brings the benefit of having centralized strategies and decisions as well as the possibility of offering a single package of services to various organizations, such as banks that contract both verification systems and software for the deposit and transaction of money.

Mitek’s current customer base is estimated at around 80 million users around the world as well as 7,500 organizations from different industries that use its services daily, whether for biometric data verification or identity recognition through sensors and software of artificial intelligence. This number of clients grows day by day, of course due to the tendency of many market verticals towards digitization and the expansion of forms of cybersecurity. Let’s keep in mind that the company believes that the target market stands at close to $15.8 billion, and grows at a CAGR of 15.6%.

Market Expectations Include Double Digit Sales Growth And Double Digit EBITDA Margin

For 2024, Mitek foresees net sales of $190 million with a net sales growth close to 13.77%. 2024 EBITDA will likely be around $59.3 million with 2024 EBITDA margin of 31.21%. Estimates also include 2024 operating profit close to $40 million, operating margin of 21%, and pre tax profit close to $7.17 million. Finally, 2024 net income would stand at $39.2 million, with 2024 FCF close to $56 million and FCF margin of 29.47%. The average sales growth obtained was close to 17%, with an average EBITDA margin of 29% and average FCF margin of 25%. I used some of these figures in my financial model, so I believe that readers may want to have a look at them.

Solid Balance Sheet

The last report we have is for the financial accounts reported for June 30, 2022. Cash in hand is worth $21.543 million together with short term investments worth $49.531 million, accounts receivable of $29.618 million, and total current assets of $112 million. The ratio of current assets/current liabilities stands at close to 3x, so I am not worried about the company’s liquidity.

Besides, long term investments stand at $19.534 million, with intangible assets of $85.743 million and goodwill of $127.992 million. Accompanied by deferred income tax assets of $12.993 million and other non-current assets of $6.959 million, total assets are equal to $374.596 million. The asset/liability ratio is equal to around 2x-3x, hence we can say that the balance sheet stands in good shape.

The liabilities include accounts payable worth $3.981 million with an accrued payroll of $10.276 million, deferred revenue of $13.220 million, and total current liabilities worth $43.788 million. Convertible senior notes are equal to $126.157 million with a lease liability close to $4.776 million, deferred income tax liabilities of around $19.227 million, and total liabilities of $197.280 million.

More Partners, More Internationalization, And Successful Integration Of ID R&D Could Imply A Valuation Of $17.97 Per Share

Under normal conditions, I believe that Mitek’s partner sales strategy will likely be successful because many clients are already using the technology. I also assumed that Mitek would be able to sign more agreements with partners globally.

Our partner sales strategy includes channel partners who are financial services technology providers and identity verification providers. These partners integrate our products into their solutions to meet the needs of their customers. Source: 10-k

I would also expect that internationalization efforts will likely help the company enhance revenue growth. Let’s keep in mind that international sales represent only a fraction of Mitek’s revenue. As European and Asian clients understand the potential of the company’s technology, revenue growth may trend north.

International sales accounted for approximately 26% of the Company’s total revenue for the twelve months ended September 30, 2021. Source: 10-k

Under this case scenario, I assumed that we may see stock demand at the current stock price. Let’s keep in mind that the stock price in 2018 was close to $9-$10 per share, and the company received unsolicited expressions of interest. The stock price is currently not far from $9-$10 per share.

In December 2018, after receiving unsolicited expressions of interest from multiple parties, we announced that we retained Evercore Group L.L.C. and Paul Hastings LLP, our financial advisor and outside legal advisor, respectively, to assist the Board and our management team in exploring and reviewing strategic alternatives. On May 1, 2019, we announced that we concluded this process. Source: 10-k

Finally, I assumed that the acquisition of ID R&D would deliver the revenue and synergies expected. Let’s keep in mind that the acquisition was not small, and goodwill represents a significant part of the total amount of assets.

To ensure a high level of security against evolving digital fraud threats, in May of 2021, Mitek acquired ID R&D, an award-winning provider of AI-based voice and face biometrics and liveness detection. Source: 10-k

My figures under the previous assumptions would include 2033 net sales of $470 million and net sales growth of 10.20%. In addition to 2033 EBITDA close to $145 million and an EBITDA margin of 30.80%, 2033 operating profit would stand at $79 million with an operating margin of 16.80%. Finally, 2033 free cash flow would be close to $84 million together with a FCF margin of 17.80%.

My results include a net present value of future FCF of $390.01 million, a terminal value of $1.159 million, and a NPV of TV of $523.22 million. The enterprise value would stand at $913.23 million. If we also assume debt of $131 million and cash of $21 million, the equity would be close to $803 million. Finally, the fair price would be $17.97 along with an IRR of 4.60%.

My Bearish Case Scenario Implies A Valuation Of Around $6.5-$7.5 Per Share

Most of the products of the company are patented. The company has intellectual property under protection as well as the development of future operations in this regard. Since they all operate under the same business segment, in my view, they lack particular depth when it comes to developing a specific product. This, considering the high competitiveness of this market, is a risk factor for expansion.

Besides, many small start-ups offer a unique product or service directly related to a development niche such as mobile transactions or identity verification. In this way, Mitek suffers from the possibility of losing effectiveness in the specific offer of these same products. Under this case scenario, I also assumed that Mitek may not be able to acquire the small competitors.

In the same way, the lack of diversification in the approach of its strategy for the insertion of its products in the market is present in the general offer of its technologies. This means that although its services have a high degree of technological development, these are not so many, and their businesses depend on a small number of products.

Another relevant risk factor comes from the company’s inability to offer new quality services or new products. If competitors, large or small, develop better technologies in the coming years, I believe that Mitek revenue will likely increase less than expected.

Finally, Mitek’s large-scale expansion into unknown markets, which in addition to variables and factors outside the local market have regional competition with other values ​​at stake for the same clients, is a risk factor when we think about the strength of their businesses mainly in the development strategy of these local communities.

Under the previous conditions, I included 2033 net sales of $312 million with net sales growth of 5%, 2033 EBITDA of $62 million, and 2033 EBITDA margin of 20%. In addition to an operating profit of $19 million coupled with a 6% operating margin, 2033 free cash flow of $31 million is expected accompanied by a FCF margin of 10%.

My results include a WACC of 8.5%, EV/EBITDA multiple of 8x, net present value of FCF of $219.85 million, terminal value of $499.5 million, a net present value of the terminal value of around $203 million, and an enterprise value of $423.08 million. With debt of $131 million and cash of $21 million, the equity would be $313 million. Finally, the implied price would be $6.5-$7.5 per share with an IRR of -3.86%.

Conclusion

Mitek runs an innovative business model in a market that grows at a double digit. In my view, internationalization, more partnership agreements, and successful integration of ID R&D could imply a valuation of around $17.97 per share. I also see risks from lack of diversification, potential failed technological development, and failed expansion into new markets. With that, I believe that Mitek is currently undervalued.