As an increasing number of of our time is spent on-line and transacting by way of digital strategies as an alternative of money, firms are having a tougher time stopping monetary fraud. Probably the greatest methods firms can fight fraud is by using id options software program, which verifies prospects are literally who they are saying they’re.
The id verification market is predicted to develop at a 13.4% compound annual development price (CAGR) and attain $17.8 billion in world spending by 2026, making it one of many world’s fastest-growing industries. Two small-cap shares, Intellicheck (NASDAQ:IDN) and Mitek Programs (NASDAQ:MITK), are driving this id options wave and might be sturdy investments over the following decade. This is why.
Intellicheck went public over 20 years in the past, however after a number of years became a damaged IPO. Shares are nonetheless down over 90% from after they first began buying and selling. The corporate has a long-running relationship with the American Affiliation of Motor Car Directors (AAMVA), which runs all of the departments of motor autos in Canada, america, and Mexico, to confirm new driver’s license varieties are authentic and comply with the correct format earlier than being distributed. This relationship offers Intellicheck a bonus over rivals as a result of it might really authenticate an ID card, with a 99.9% success price. Different firms with out this unique AAMVA relationship are pressured to make educated guesses based mostly on historic knowledge, bringing their success charges down.
With the AAMVA knowledge, Intellicheck constructed a software program answer that it sells to all varieties of retailers which might be vulnerable to accepting pretend or stolen identities. When a buyer indicators up for a membership program or is making a giant buy with a retailer, the cashier scans the client’s driver’s license, after which Intellicheck routes the related info to its database to find out whether or not the ID is pretend or stolen. This can be a big worth added to retailers which might be vulnerable to getting duped by fraudulent purchases, particularly for costly gadgets like vehicles or jewellery.
The issue is, whereas Intellicheck has arguably one of the best id answer, it has traditionally been atrocious at advertising and managing the product. This all modified when CEO Bryan Lewis joined the corporate round three years in the past. Lewis began advertising Intellicheck’s software program by way of main monetary establishments that will then pitch the fraud detection product to the businesses that financial institution with them (monetary establishments are usually those on the hook when fraudulent exercise happens, so that they have a serious incentive to cease it from occurring).
This advertising swap has led trailing-12-month income to develop from solely $4 million within the second quarter of 2018 to $10.5 million on the finish of final quarter. Intellicheck additionally has a best-in-class gross margin that constantly sits above 90%. It’s not but worthwhile as it’s spending numerous cash to construct out its salesforce. Final quarter it employed three further salespeople, bringing the full on workers to 9. This gross sales group is touchdown giant purchasers. On the convention name final quarter, Lewis mentioned the group was starting to roll out its software program to the “largest house enchancment retailer in america.” Although it did not determine the corporate by identify, it seems Residence Depot is now utilizing Intellicheck’s software program in its shops.
At a market cap of $143 million, Intellicheck trades at a trailing price-to-sales ratio of 13.6 and doesn’t but have an earnings a number of because it is not worthwhile. Whereas costly relative to its historic financials, if you’ll put money into Intellicheck, you are betting that the corporate can proceed rising gross sales at a excessive price over the following few years because it tries to win new prospects within the id options market.
Whereas Intellicheck is especially targeted on in-person transactions and verifications, Mitek Systems focuses on stopping id fraud on-line. Its legacy enterprise is powering cellular verify deposits for banks. This can be a pretty stagnant market, as checks have grow to be much less standard types of cost during the last decade. Nonetheless, as a result of growing adoption of cellular deposits amongst individuals who nonetheless use checks and Mitek’s pricing energy with banks, cellular deposits grew income 16% final quarter to $17.2 million.
Cell deposits are a gentle however low-growth enterprise for Mitek, however its digital id merchandise are the place it ought to get probably the most development over the following few years. Final quarter, this phase, which helps companies affirm identities on on-line platforms, grew income 35% yr over yr to $11.6 million. Mitek’s prospects for digital id embrace fast-growing platforms like Airbnb, Instacart, and DocuSign. It would not have as excessive a hit price as Intellicheck, which probably might pose a risk to Mitek if it begins meaningfully rising its on-line answer, however the lock-in it has with these giant digital platforms ought to give Mitek regular development over the following few years and past.
Mitek’s market cap is presently round $720 million. It has a excessive gross margin like Intellicheck, however is definitely worthwhile and trades at an affordable a number of of 23 instances its trailing-12-month working money movement. There are some dangers to a part of the enterprise with the decline in verify utilization and the actual fact it might have gotten a one-time increase for on-line verification in 2020 as a result of negative effects of pandemic lockdowns. However when you consider companies are going to spend extra money preventing on-line fraud, Mitek Programs is likely one of the market leaders and trades at an affordable valuation.
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