Mitek Systems Is A Monopoly
Mitek (MITK) has two business segments: the mobile checking deposits segment is 63% of their revenue and grew 11% and the digital identity verification solutions is 37% of their revenue and grew at 32% (36% adjusted for discontinuation of legacy offerings). Mitek has a 98% market share in the mobile checking deposits industry making them a monopoly. They have pricing power and will continue to raise prices with incremental revenue dropping down to the bottom line. The digital identity verification solutions segment is a fast-growing segment with a long runway. Mitek has multiple advantages which will make them a winner in this high-growth high-margin business as well.
Mobile Checking Deposits Segment
Declining Check Volume
The value of money in check payments has been losing market share to other forms of payment. The decline in check payments by volume was 7.7% from 2003 to 2012. That decline has slowed to 4% from 2015-to 2018 (More recent data is not available).
Mobile checking deposits are gaining market share of the total check market offsetting the lower checking volume. In 2013, only 38% of people have tried mobile deposits. Covid has accelerated the adoption of mobile deposits. “We are seeing the sort of increases in consumer use of mobile deposit that would have taken 10 years in normal times, but in pandemic times only took 10 months to achieve. And a huge percentage of these new users will not return to the old ways of depositing their checks even once the pandemic has passed. Higher percentages of customers using mobile deposit is the new normal” Michael Diamond stated (Mitek’s general manager of digital banking). Of the consumers who used mobile checking deposits in 2020, 42% of them did so for the first time.
Check Fraud is a massive issue for banks. It is estimated that check fraud accounts for 60% of all fraud against deposit accounts. A report by the American Bankers Association stated that attempted check fraud totaled 15.1bn in 2020. Given the risks, having the second-best fraud detection tool is not a viable option.
Mitek Systems has a 98-99% market share in mobile checking deposits and USAA has a 1-2% market share, but they specialize in military members not directly in competition with Mitek. Mitek virtually controls all of the non-government checks market share. Mitek has multiple competitive advantages allowing for this giant market share.
Mitek's Reinforcing Competitive Advantage
The mobile checking deposits software is a machine learning-based tool. With more data, the software gets more accurate. Mitek has all the customers, thus, all the data and the most accurate model. With a 98% market share, their model keeps expanding its lead. They have deposited more than 4 billion checks creating a giant lead. It would be impossible for another company to process this much live data. Their software is also patent-protected providing an additional barrier for more entrants. Mitek has 36 patents directly related to the mobile checking deposits segment.
Mitek signs long-term contracts with banks regarding mobile deposits. Many of the historical agreements were “poorly negotiated” for Mitek. As the contracts expire, Mitek can raise prices. Mitek has been raising prices “for eight or nine quarters” and will continue doing so for the “next eight or nine quarters”. The revenue growth for this segment is supposed to be “over 10%,” according to Mitek management.
Digital Identity Verification Solutions
The global verification market is a 7.6bn dollar market and is supposed to grow more than 100% from 2020 to 2025. The growth is driven by banks digitalizing their solutions. Mitek management stated, “In the financial services sector, for instance, the percentage of banking products, consumers can open through a digital channel has jumped from 43% to 76% over just the past two years, and about 90% of these can be opened from a mobile device.” The risk of fraud increases consistently with customer convenience which makes Mitek’s services extremely valuable.
“Bad actors use digital images of valid or altered driver's licenses, passports, and other identity -- identification documents in their attempt to spoof identity verification processes. IDLive Docs tests for document liveness and uses AI and computer vision to distinguish between an original document and a digital image of a document shown on a mobile device or a computer display”, Mitek management explained. Mitek’s CEO estimates they have a 20-25% market share in the identity verification industry, most of which is coming from the financial side.
Mitek's Key Customers
Mitek has an advantage in the financial industry because of its ability to cross-sell its existing customers. All of the top 20 US banks are already customers from the mobile checking deposits side. Mitek’s reputation and status as a customer give them a unique distribution advantage over their competitors. Gaining market share is key in the digital verification industry. The more data a company has, the more accurate its service will be.
Use cases for this technology exist outside of the financial services industry including in the gig economy. Airbnb, Turo, and Instacart are all customers of Mitek. As these fast-growing upstarts grow, so will Mitek’s revenue. CEO Max Carnecchia was asked, “do you think (revenue) accelerates, you think this is a 40%, 50% growth market?” He responded “Yeah”.
For a two-minute demo for Mitek's Digital ID Services Click Here
Mitek’s biggest risk is their ongoing litigation with USAA. Mitek and USAA worked together to develop the mobile check deposit solution. “In 2012, they had a falling out over patent ownership. In 2014, the differences were settled and both companies agreed to suspend legal actions.”
In 2017, USAA sent letters to 100 banks offering a “licensing program”. They claimed that these banks were violating patents. In 2019, USAA sued Wells Fargo, a Mitek customer, and won. They then announced they will go after PNC Bank next. A Wells Fargo spokesperson said the case was an "industry issue involving numerous other banks that license remote mobile deposit technology from the same vendor, not USAA." Mitek has responded with a lawsuit of their own claiming USAA's litigation against Wells Fargo "placed a cloud over Mitek's products and services." No major updates have appeared in media of any kind since 2019.
CEO Max Carnecchia was appointed to the position in late 2018. He was formerly the CEO of Accelrys and Illuminate Education. His executive compensation plan is mainly long-term stock options and restricted stock unit awards aligning his incentives with shareholders.
Unfortunately, Mitek does not break out expenses by segment. It can be assumed that Mitek’s check deposit business is a cash cow. Mitek spends 23% of its revenue on research and development (R&D). Based on their competitive positioning on the check deposit business and the growth potential of the ID verification business it can be assumed that almost all of the R&D is spent on the ID verification business. Mitek has also made multiple acquisitions including the company ID R&D for 49 million to help them bolster their ID verification offering. They have also instituted a share buyback plan and have built up their cash position.
Given Mitek’s competitive advantage, it should come as no surprise that insider activity is favorable. Insiders are buying at a rate of 2 for every 1 sale. Famed investor Peter Lynch said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
The mobile checking deposits segment grew revenue by 12% in 2021 in line with what management has been guiding. Mitek should be able to exercise its pricing power continuing to grow revenues. The lack of competition and importance of mobile checking deposits should allow Mitek to continue to grow revenues at a low double-digit rate which management has guided. The ID verification is projected to grow at a 40% rate in 2022, at the lower end of management's statement about acceleration to 40 to 50% growth. From there, it will decelerate, but at a slow rate due to the long runway of the industry and Mitek's competitive advantages. Note: Mobile Checking Deposits and ID Verification Revenue do not add up to Total Revenue due to rounding.
Total Revenue will accelerate in 2022 due to a more favorable product mix and acceleration in growth on the ID verification side. Cost of Revenue and SG&A percentage of revenue will continue to decrease as few incremental costs will be incurred allowed by the nature of the software industry. EBITDA will increase rapidly as incremental revenue growth has few expenses. Shares outstanding will have some dilution due to Mitek's executive compensation plan. In 2025, I project Mitek to trade at an EV/EBITDA multiple of 20 factoring in significant multiple compression. Mitek will produce an 18.3% IRR over the next four years if these assumptions prove true.
Disclosure: I/we have a beneficial long position in the shares of MITK either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.