Stocks I’m Looking at Part I: Mitek

Over the last two weeks I’ve been focusing on finding new opportunities.  I’ve been posting thoughts about the stocks that I have been looking at through my twitter account (@LSigurd) but I have yet to write about any of them here.  This post is the first in a series I want to do over the next week of brief summaries of my findings.  These posts are not intended to be in-depth analysis as much as they are a broad overview of why I think these companies deserve a closer look.  I am writing them as much for myself as anyone else, before I forget I ever had the ideas at all.

MITEK (MITK)

I rather painfully bought this one at $2.40, sold it on some concerns I had with their revenue model after reviewing the conference calls, and then bought some of them back on the news Wednesday that they had found a partner in US Bank for their new bill paying product. Below are the transactions in my practice account.

I learned of Mitek from a poster on InvestorsVillage (doomonyou) and was drawn to look at bit closer after seeing the company’s growth trajectory.  The company sells products that are based on an imaging technology that they have developed.  Their first commercial product, which has been out over a year now, allows you to take a picture of a check and have it uploaded and deposited in your bank.

On the third quarter conference call the company said that they had been signing up new banks to use the product at an impressive rate.

We have signed a cumulative total of 564 financial institutions for mobile deposit and continue to be the market leader. We signed a record number of 156 new financial institutions during our fourth quarter and 392 during fiscal 2012 and this includes 28 out of the top 50 retail banks in the nation ranked by asset size according to Forbes.

The problem that Mitek has had has been a combination of slow adoption of their first product offering and the revenue model that they sold the product on.  Basically, Mitek sold blocks of usage upfront.  Maybe you bought 1,000 uploads or 10,000 uploads, but you bought them when you signed on and Mitek booked the revenue at that time.  This created a situation where revenues initially increased as these contracts were signed, but then lulled as adoption of the service only slowly took hold in the banks.

I’m not too concerned with the slow adoption because it sounds like its mostly on the part of the banks rolling the product out, not the customers using it.  But I understand that there is a bit of a leap here;  its really a case where you have to look at the technology and try to project your own expectation on how it might play out.  While I am inclined to think this will be adopted by consumers as an alternative form of banking, I am by no means sold on that.

On the third quarter conference call management said that they would be adjusting the revenue model going forward to one that was more closely tied to the usage of the product.  The most immediate and probably significant new product is the one that they just signed up US Bank for.  It uses their imaging technology on bills, so that you can pay a bill by taking a picture of it and uploading it to your bank.

Of note is that the company is involved in a patent dispute with United States Automobile Association (USAA).  The announcement of the dispute back in April was what initiated the stocks decline, a decline that was then exaggerated by the realization of analysts that the existing revenue model was flawed.  There is a good article on SeekingAlpha that goes into some detail about the dispute.  I have to admit that at this point I don’t feel qualified to offer an opinion on the outcome.

My position here is very small.  While I like the idea of using your smart-phone to do your banking, and I can imagine that the imaging technology could be extrapolated to other applications quite easily, the company still has yet to prove that they can make money with the technology.  Of course that is why the stock is down from a high of $12 to a little over $3.  Nevertheless, at this price the market capitalization of the company is still $100 million and revenue over the last 9 months is only $7.9 million.  So even at these levels the stock is pricing in a fair amount of growth.  I don’t think I will be adding much to the stock I bought at these levels without more clarity around how quickly that revenue can grow, so it will remain almost more of a curiosity position for me, as I am interested in seeing how this plays out and there could be potential to add if things start to play out the right way.