20 - 60% Upside In Mitek Shares

| About: Mitek Systems (MITK)

Summary

Mitek customers include 5500 financial institutions worldwide consisting of 99 of the top 100 U.S. banks.

Among Top 15 U.S. Banks, mobile deposits grew 140% from 2013 - 2016.

Six analysts cover Mitek Systems stock and there is a consensus “buy” rating and average price target of $9.25, ~60% upside from current levels.

Mitek has first mover advantage and penetration opportunity - only about 20% of all bank customers who have an online connection are regular users of mobile deposit.

A recent customer win included MoneyGram, which is the second largest money transfer service in the world.

Mitek Systems (NASDAQ: MITK) was recently named one of Forbes fastest growing companies and was added to the Russell 2000 index in June. The San Diego, CA based company is a pioneer in the fintech space and has seen increased traction and adoption mainly in its ID verification technology - which is crucial given the high levels of regulation in the financial services sector. Executives at the company have estimated Mitek's mobile deposit market share to be about 65% and is projected to grow at 20% next year. Moreover, Mitek's mobile verification market opportunity is projected to be worth close to $4 billion.

Investment Thesis:

Mitek has gained a dominant market share in an important fintech niche by offering a compelling value proposition. With increasing KYC (Know Your Customer) and Anti-Money Laundering (AML) regulation, financial institutions need a cost-effective way to verify customer's identity when onboarding takes place. P2P business lender Kabbage was able to reduce its customer rejection rate from 3% to 0.5% by implementing Mitek's mobile ID verification solution. Using Mitek's ID verification solution, a leading payments company was able to lift temporary restrictions on 92% of its users in a matter of minutes. Despite these positive customer outcomes, Mitek shares have dropped more than 20% over the last six months, creating a compelling entry point. The average analyst price target for Mitek is $9.25, a nearly 60% upside from current levels.

Mitek's business units include:

Mobile Verify - primarily used for customer onboarding. Ex. Customer walks into their local branch to open a checking account and the banker checks their ID

Mobile Docs - Scan and verify documents such as paystubs, W2's, bank statements, tax returns and any other documents needed to securely send and verify data via a mobile phone

Mobile Fill - Allows users to save time filling out large applications and questionnaires by pre-filling data via mobile

Mobile Deposit - bank customers can deposit checks on their mobile phone.

Multi Check Capture - commercial customers can deposit large sets of checks

Recent highlights:

Mitek reported Q12017 revenue of $9.3 million, or 25% year over year growth. A recent customer win included MoneyGram, which is the second largest money transfer service in the world. Mitek customers include 5500 financial institutions worldwide consisting of 99 of the top 100 U.S. banks. Mitek has 70 million users worldwide and recently signed a retail pharmacy store which has 7,000 locations.

There Remains Penetration Opportunity for Mitek because the Majority of Banking Customers in the U.S. have Yet to Adopt Mobile Deposit Technology

The following is an excerpt from a market research report conducted for the top 15 U.S. banks which include Mitek customers such as Bank of America, Wells Fargo, Chase, and Citigroup.

" Mobile deposit adoption is only 41% of online banking customers. In addition, only 53% of customers who use MD are highly active customers and fully one in ten have become inactive users. In practical terms, this means that only about 20% of all bank customers who have an online connection are regular users of MD. Improving this is not only possible, it's a necessity. The two categories of 'highly active' and 'inactive' represent two extremes (of most recent usage, and these two groups fall on either side of the 37% (who are neither highly-active nor inactive, but rather somewhere right in the middle)."

Branchless banks are likely to play a bigger role in the future banking landscape given the high overhead costs in running retail branches. As millennials become a larger share of the workforce, mobile banking will continue to grow. The report goes on to say that the average growth rate among mobile deposits for U.S. banks was an astonishing 140%! Banks such as BBVA and Capital One have been at the forefront of adopting financial technology and were the top two ranked banks in Mitek's market research report, which ranked banks based on adoption of financial technology and innovation.

Balance Sheet and Valuation

Mitek Systems has a strong balance sheet sporting $34.5 million in cash and no debt. The company has about $6MM in current liabilities. Management has guided for 2017 revenue of $43 - $45MM and 20% operating margins. Mitek's gross margin is about 96% as it costs Mitek very little to implement and license its product offerings to financial institutions. Management has projected opex in Q2 at $8.3MM to $8.8MM. Currently, six analysts cover Mitek Systems stock and there is a consensus "buy" rating and average price target of $9.25. That is about 60% upside from current levels. If we assume a current 5.5 sales multiple, the implied equity valuation is about $7.16 per share, a little more than 20% upside ($44MM in 2017 revenue guidance x 5.5). Moreover, management has guided for 20% operating margins in 2017. Assuming management can deliver on its projections, Mitek would produce $5 - $6 million in net earnings for 2017. Mitek analyst's one year price target assumes forward price to earnings of about 50 (at current prices forward P/E is about 30), which is not outrageous for a company like Mitek which has a high market share of a high growth industry. Management is candid and excited about Mitek's recent customer wins and growth opportunity moving forward. Mitek is likely to be an acquisition target given its dominant market share and strong balance sheet. Acquirers could include names such as FICO (NYSE: FICO), TransUnion (NYSE: TRU), Equifax (NYSE: EFX), or Experian (OTC: OTCQX:EXPGY).

Disclosure: I am/we are long MITK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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