The market for digital identity verification is expected to grow at a pace of over 13% CAGR for the next several years. Mobile identity verification is set to grow even faster.
Among the names vying for a share of the market is Mitek Systems, Inc. (MITK), a company known primarily for its remote check deposit service called Mobile Deposit. Mitek’s application, which utilizes the user’s mobile or PC camera to scan checks as well as verify the identity of the user, allows checks to be deposited remotely at more than 7,500 financial institutions.
The pandemic has been a significant tailwind for Mitek’s remote check deposit business, but there are two lingering problems that have suppressed the share price. The first is that the market for remote check deposit is fading as fast as the use of checks. It may take several years, but the use of checks will eventually disappear almost entirely, replaced by various forms of digital payments.
As for the second, it relates to an ongoing patent dispute with former partner and now competitor United Services Automobile Association (USAA).
Legal Troubles
Several years ago, the two companies teamed up to develop a remote check deposit solution, but in 2012, they had a falling out over patent ownership. In 2014, the differences were settled and both companies agreed to suspend legal actions.
Now, after several years and a change in leadership, USAA has picked its patent infringement accusations back up. However, USAA has a new strategy. It is not suing Mitek, but instead is taking legal action against Mitek’s customers. USAA has already won two judgements against Wells Fargo (WFC) in excess of $300 million combined. Additionally, USAA has now announced that it is going after PNC Bank. If USAA keeps winning in court, it could theoretically take legal action against each of Mitek’s 7,500 customers.
While the final outcome of the dispute between USAA and Mitek is uncertain, USAA has been victorious in court so far against Wells Fargo. Wells Fargo has not been successful in reversing the court decisions and has not indicated whether it would attempt to recover the settlement from Mitek, which would likely bankrupt the latter.
Identity-as-a-Service
Currently, two-thirds of Mitek’s revenue comes from remote check deposits. Given the two problems with remote check deposit highlighted above, it is important for Mitek to expand into new industries.
The company has been doing just that the last few years by venturing into the Identity-as-a-Service (IDaaS) space. The purpose of IDaaS is to verify an individual’s identity during digital transactions. Given that Mitek already has a relationship with a vast number of retail banks and other financial institutions, this should prove to be an advantage for growing the company’s IDaaS market share.
Its applications include Mobile Verify and Mobile Docs. Mobile Verify provides customers with the means to scan an identity card or passport, verify the customer’s identify with live face comparison, and pre-fill forms with the extracted information. Mobile Docs allows users to upload documents while verifying the owner and the owner’s address. The application is used for such services as brokerage account opening, remote notarization, remote hotel check-in, and accessing government websites.
Putting the legal issues aside, Mitek has been a strong performer, particularly during the pandemic when remote deposit has had a renaissance of sorts with the distribution of government handouts. In Q1’21, total revenue grew by 18% year-over-year. Identity Verification revenue grew by an impressive 40% year-over-year. On top of this, trailing twelve-month free cash flow margin of 25% was also very strong. Despite the solid financial performance, the stock price is a bargain, with a price/sales ratio of 6, quite low for a growth stock.
Wall Street’s Take
From Wall Street analysts, Mitek earns a Strong Buy consensus rating, based on 3 unanimous Buys. Additionally, the average analyst price target of $22.00 puts the upside potential at 44%. (See Mitek Systems stock analysis on TipRanks)
Summary And Conclusions
Mitek is an industry leader in remote check deposit, an industry that experienced strong tailwinds during the pandemic. That said, the company faces two problems. First and foremost, the market for remote deposit is expected to shrink over the next several years in conjunction with declining check usage. The second issue is that Mitek has an ongoing patent dispute with USAA, and depending on how the court actions play out with Mitek’s customers, the company could end up bankrupt.
On the positive side, Mitek has more than 7,500 customers consisting of regional banks and other financial institutions. Mitek’s relationship with these organizations is ideal for cultivating the company’s IDaaS applications. Revenue growth and free cash flow are also both strong.
Disclosure: On the date of publication, Steve Auger did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
