- Mobile deposit adoption is still in the extremely early stages at roughly 5% of all deposited checks.
- ATM adoption quadrupled at JPMorgan Chase from 2007-10, and mobile deposit will follow a similar path.
- MITK earnings power is over $1.50 from their mobile deposit technology alone, and a $30 stock price is not unrealistic.
Mitek Systems (NASDAQ:MITK) is the company behind mobile deposit, which is the most promising innovation in banking since the ATM. Every check deposited in the United States via a mobile device uses Mitek's patented image capture technology. Mitek currently has 2,222 banks signed up to use their mobile deposit technology, including all of the top 10 banks. The stock has declined meaningfully year to date for a few reasons but importantly the decline is not driven by deteriorating fundamentals of the company. In fact, the fundamentals (customer adoption and revenue growth), which are the focus of this article, have never looked more promising.
The stock has fallen because of false rumors of a new competitor and a lost customer, an additional 2mm shares have been sold short, and a general malaise in small-cap and technology stocks. The company has issued a press release dispelling these rumors, but it has fallen on deaf ears. MITK maintains 100% market share, 100% customer retention, and 100% ownership of what could be the most rapidly adopted banking product ever. In this article, I will highlight MITK's revenue and earnings potential from its lead product, Mobile Deposit. I will also highlight the extremely compelling risk adjusted return for MITK stock.
Starting with revenue, mobile deposit adoption is still in its infancy but is growing exponentially. Based on MITK's estimates, less than 10% of consumers nationwide have used mobile deposit at least once while less than approximately 5% of total consumer deposits are currently deposited using a mobile device. While these are small percentages, they were near zero two years ago and have grown very rapidly. Bank of America is the best example of this growth. At Bank of America, the number of checks deposited using Mobile Deposit grew to nearly 100k per day after in its first year and nearly 150k per day in its second year. According to Bank of America, Mobile Deposits now represent more than 10 percent of deposit transactions at the bank. More specifically, based on my proprietary analysis, which I track weekly for most of the major banks, 182k checks per day were deposited at Bank of America in April 2014, which is up over 40% since April 2013.
In fact, all of the major banks that I track have seen enormous growth since they rolled out mobile deposit. At Wells Fargo over 90k checks per day were deposited in April, which is up over 100% annualized over the last six months. At PNC Bank almost 25k checks per day were deposited in the recent March quarter, which is up 60% quarter over quarter annualized. At JP Morgan Chase approximately 115k checks per day were deposited in the March quarter which is up 40% YOY. Combined, these four banks (four of the five largest in the U.S.) are not even a half of a million checks per day in mobile deposits. As per the Federal Reserve, over 20mm checks per day are written to consumers based on a 2010 payment study.
So, the key question for MITK shareholders is: What is the total revenue opportunity of mobile deposit? The answer to this question depends greatly on the ultimate product adoption. As adoption shifts from the innovators to the early adopter, early majority and the late majority phases, penetration should double, then double again, and then double again. ATM deposit adoption in the mid-2000s is an excellent guide for how adoption will occur for mobile deposit. The chart below is from JPMorgan Chase's analyst day two years ago.
The chart shows the percentage of consumer deposits through tellers and the number of ATM deposits per household. Back in 2007, 90% of all consumer deposits were done with a teller and only 0.4 checks on average per household per quarter at an ATM. The implication is that back in 2007 only 10% of all deposits where done using an ATM. Interestingly, as discussed above, mobile deposit is still early compared to the ATM back in 2007.
Three years later in 2010 almost 40% of all consumer deposits were done at an ATM (1.9 checks per household per quarter). ATM usage more than quadrupled in just three years. Why? Simply because ATMs are more convenient than going to the bank and waiting in line for a teller. Well, the same is true for mobile deposit relative to the ATM or Teller. Depositing checks from the comfort of your home or office is simply much faster and more convenient than driving or walking to a branch/ATM, especially if it's raining or snowing. Just like the ATM, mobile deposit adoption should go from 10% of consumers using it (approximately 5% of all deposits) to 50%, 60%, and 70% of consumers using it (40% of all deposits) over roughly the same period of time, if not faster.
As mobile deposit adoption continues to ramp aggressively, so too will MITK's revenue. Conservatively, MITK's current annual revenue of $18mm will very easily surpass $100mm from mobile deposit alone (20%-40% penetration * 20mm checks per day * 8c per check). Finally, this could just be the beginning as MITK has other infant stage products and uses such as photo mobile bill pay.
Now to earnings -- what is the profit margin on all of that revenue? It's very high. It's critical to understand that MITK's true incremental margin is huge. That is to say every additional dollar of revenue from the current $18mm run rate requires no real additional cost. MITK will certainly continue to invest in its business but assuming 75% incremental margin and revenue grows to $150mm, earnings will be well over $1.50/share after taxes and the stock will be between $20 and $30 per share depending on the growth of other products.
So what about the risk? There is absolutely risk in owning MITK stock, but, contrary to popular belief, the risk is palatable and relatively small when measured against the stock's 10x upside potential. The biggest risk to the stock is the patent challenge from their first customer, USAA Bank. For background, MITK has posted the history on their website. While I am not a patent attorney, it appears that MITK has an extremely good case. Even in the worst case outcome where USAA is determined by the courts to be a co-inventor of the original patent, this does not mean that MITK would lose the right to sell their product. Rather, it would mean that USAA could use it for free and license the original software to others.
With over 2,222 banks signed up, continuous advancements in their technology (MiSnap), and other mobile banking products (photo bill pay, balance transfer, photo account openings) from MITK, the risk of a large revenue hit is minimal. As time passes, MITK creates higher barriers to entry and becomes integrated with bank's mobile offering. Finally, even in the event of total failure for whatever reason, MITK has $.85/share in net cash on the balance sheet, which would serve as a floor for the stock.
So, summing it all up, I see a 10x return opportunity in MITK stock with possible downside to net cash value of 85 cents in a highly unlikely liquidation scenario. This works out to a reward-to-risk ratio of ~12:1 and makes MITK one of the most compelling long-term investments I have ever seen. In the short term, with over 28% of the float sold short (an all-time high), it won't take much positive news from the current price level to create a panic buying situation. In fact, this may be starting now.