Mitek Stock: Legal Overhang Sees No Development (NASDAQ:MITK)


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Posted on the Value Lab 05/03/22

Mitek (NASDAQ: MITK) was once part of our portfolio and brought us a nice return. The basis of our thesis was that the legal overhang created a sufficient discount despite the risks for us to buy into Mitek’s growth story that has been significantly underpinned by secular trends that have been accelerated by COVID-19 in digitization and KYC. We used an options approach to determine that the implied values ​​were low. MITK is down significantly (33%) since we last covered it, and we expected the declines to be a consequence of developments the company has been experiencing. There has been slow growth driven by identity, but not much else, certainly not legal developments. Trusting the market fundamentals and growth story, we would say the markets are attractive, the product is top notch, and we continue to support MITK with the intention of re-establishing a position.

Legal overview

It is worth taking a brief look at MITK’s legal issues. In short, MITK’s customers have been the target of lawsuits by the USAA which essentially claims to have invented MITK’s technology related to computer vision and controls. MITK has had issues with USAA before in court that settled with a few separate technology admissions, so USAA took this new strategy against MITK, hoping that customers will be deterred from using MITK’s software because of the risks. legal. It didn’t seem to have worked apparently.

Yeah. So this is the first I’ve heard of this, we haven’t had any of this in our experience, whether it’s with the conventional products we bring to banks for mobile check deposit or whether it’s it is Check Fraud Defender. As a reminder, the two ongoing lawsuits in this area in no way directly involve Mitek. And we haven’t had any customers who have reduced their usage or pushed us back from adopting Check Fraud Defender or mobile check deposit, as a result of USAA’s actions with the financial community within the meaning broad regarding remote banking services.

Max Carnecchia, CEO of MITK

Value of options updated

We used an options approach to value MITK. Essentially, we have determined that using comps of companies unimpeded by the legal overhang, the contingent value of the challenged company is approximately $600 million. An option value approach based on volatility numbers implicates 57% of $600 million ($342 million) as the value of the disputed check deposit business, where MITK licenses its technology to clients. The implied value based on residual market capitalization is then $150 million for the uncontested activity. This business is the identity and provides all the long-term growth prospects for MITK and major growth currently as a computer vision (ML-based) KYC product. Identity has an annualized revenue of $53 million, so the company is valued at less than 3x P/S. Identity revenue was up 16% year-on-year compared to very tough competition in Q2 2021, when KYC digitization efforts were in full swing. The growth here is very impressive both on an idiosyncratic basis and also for the industry. A multiple of 3x is basically cheap.

Acquisition of HooYu

Growth is currently driven by the check business (24% YoY growth versus 16% for identity), thanks to the launch of a host of new products that are disrupting the industry with the Check Fraud Defender and KYC products related to checks. These products went live from the third quarter of last year and another was launched in February, and they are contributing to the growth on top of the underlying digitalization growth in this business.

Identity business is their other focus where inorganic has been the way to go. They have acquired technologies from R&D ID to fight deepfakes in June of last year (so it doesn’t affect Q2 growth rate comparisons), and they continued that frenzy with a twice as large acquisition of ID R&D with HooYu. The idea here is that there are identity headwinds related firstly to a concluded contract creating a difficult composition, but also to customers requiring a low-code orchestration service to manage their KYC processes. in a modular way. HooYu provides this and quickly fills this gap in its offering so that it can take full advantage of the KYC opportunity, driven by relevant trends such as deepfakes and an increasingly digital world.

HooYu is not profitable, but has annual revenues of $10 million, growing faster than MITK’s identity business, so expect at least 20% inorganic growth in the identity for the next quarters after the consolidation. The acquisition should delivery assistanceand we see the logic of paying a big tag in order to capitalize on a very opportune moment in history.

conclusion

MITK remains a binary and risky game because of the very difficult to quantify legal overhang. This is also why the market was blind with its discount despite attractive end markets. Our options value shows companies undisputed, and their most interesting companies in fact, and significantly undervalued despite their excellent profile. As before, and at a better price, we consider MITK a clear buy.

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