Mitek Systems Is Fundamentally Undervalued Despite Recent Issues (NASDAQ:MITK)

Mitek Systems (NASDAQ:MITK) operates a leading digital identity verification and mobile deposit platform serving over 7,500 organizations globally. Despite a pristine history of rapid growth, high margins, and significant market opportunities, MITK trades at a valuation of just 3x Price/Sales, a significant discount to SaaS peers. I believe the post-2021 drawdown in the stock has run its course, and there’s an opportunity here to invest in a secular growth business at a reasonable valuation.

Investment Thesis

Mitek Systems is fundamentally a SaaS business with recurring revenues and gross margins exceeding 85%, yet it trades more in line with a declining hardware company. Recent issues with financial reporting have been overshadowing the company’s strong underlying businesses and fueling uncertainty among investors. I rate MITK as a Buy for the following reasons:

• New CFO with immense public company experience will resolve reporting issues, catalyzing a valuation rerating
• The identity verification industry is set to double over the next decade, fueling MITK’s core business
• Consistent execution evident in historic revenue growth and net revenue retention
• Massive discount vs software peers despite robust growth, profitability, and retention metrics

Company Overview

Mitek Systems is a pioneer in mobile image capture and identity verification solutions. The company serves over 7,500 financial institutions and fintechs worldwide via two key segments – Deposits and Identity.

Deposits Segment (~58% of Revenues)

Mitek invented the first Mobile Deposit solution used by millions today to deposit checks via smartphone cameras. This remains a steady growth business as digital banking adoption increases globally. Mitek’s patented image processing technology ensures smooth, high-quality check captures.

Beyond mobile deposits, Mitek offers an AI-powered Check Fraud Defender solution that analyzes deposited checks and detects potential fraud using advanced analytics. This reduces financial losses from forged or altered checks.

Identity Segment (~42% of Revenues)

Mitek’s Identity business provides digital identity verification to securely onboard users and authenticate online transactions. Solutions include document verification, facial recognition comparisons, and multifactor authentication.

This business sits at the intersection of two booming trends – rising digital financial transactions and increasing identity fraud. Mitek’s accuracy and security build trust in the digital economy.

The MiVIP platform serves as Mitek’s end-to-end identity verification solution combining leading technologies into flexible workflows:

• Document Verification: Confirms legitimacy of government IDs
• Biometric Checks: Matches selfies to ID photos via facial analysis
• Liveness Detection: Ensures authentic user not digital fake
• Background Checks: Screens credentials against known databases

Competitive Advantages:

• Proprietary Mobile Check Capture Technology Covered by Over 80 Patents
• Decades of R&D in image science and recognition secure Mitek’s lead in deposits.
• Expanding Portfolio of Identity Solutions Built for Highly Regulated Verticals
• Mitek’s roots serving financial institutions position it perfectly as identity verification penetrates banking, fintechs, cryptocurrency, and beyond.
• High Customer Loyalty Evident in 120%+ Net Revenue Retention

Sticky customer relationships validate excellent product-market fit and renewal rates. The identity verification industry is expected to almost double by 2030. Mitek sits ready to continue gaining market share given its technological strengths and financial institution foothold.

Recent Nasdaq Delisting Notice

Mitek received a delisting notice from Nasdaq in December 2023 due to delays in filing quarterly reports for FY2023. This resulted from a necessary auditor change halfway through the fiscal year.

Management communicated that the previous auditor, Mayer Hoffman McCann P.C., unexpectedly resigned during Q2 2023 as the fast-scaling business required a larger auditor. The transition to a new auditor proved more complex than anticipated, delaying filings.

Crucially, both auditors confirmed no financial misconduct occurred behind the scenes. While certainly embarrassing, this seems more of a temporary administrative bottleneck and not a core business issue.

Newly appointed CFO David Lyle brings over 25 years of public company experience to resolve this hiccup. I expect prompt resolution of filing delays and full Nasdaq compliance within this quarter.

Financial Profile

Despite the current overhang, Mitek’s operating trends showcase an excellent SaaS business with recurring transactional revenue. Financial highlights include:

• 28.8% revenue CAGR from FY2013 to FY2022
• ~87% TTM gross margins
• 27% TTM EBITDA margins
• 120% net revenue retention

Impressively, Mitek continues executing operationally amidst macro volatility with high-teens full-year revenue growth expected. In addition, Mitek holds a fortress balance sheet with $128 million in cash against $134 million of long-term debt (2.8x EBITDA). The robust cash position and minimal leverage provide downside support during market disruptions.

Massive Disconnect: Valuation Relative to Fundamentals

Comparing MITK to software peers illustrates the vast disconnect between strong operating performance and mediocre at best valuation multiples. MITK trades at just 3x Price/Sales, far below the median SaaS multiple of 6-7x.

Applying a 5x multiple to guided $180 million 2024 revenue estimate yields a $20+ price target, 60% above the current stock price.

Mitek is radically undervalued relative to intrinsic business value. I expect significant multiple expansion once transient accounting issues are resolved.

Upside Catalysts

• Regain investor confidence as new CFO stabilizes financial reporting
• Better than expected growth of Mitek’s market share in growing space.
• Scale driving operating leverage: higher than expected earnings growth.

The identity verification industry sits ready to almost double over the next decade. Mitek looks prepared to leverage innovative technology and customer retention to continue gaining share.

Risks

• Failure to File Delayed Financials Promptly: Lingering accounting issues
• Legal Verdict Against Mitek: Damages from ongoing USAA litigation
• Industry Disruption: Innovative space constantly evolving

While risks remain, Mitek’s current valuation provides substantial margin of safety even if execution stumbles slightly. Secular industry tailwinds coupled with competitive strengths should support significant share price appreciation over time as temporary administrative issues subside. I rate Mitek shares a Buy.