“The most compelling, under-the-radar way to play what promises to be the biggest tech breakout of 2011”

By Travis Johnson, Stock Gumshoe, January 26, 2011

Sometimes a tease comes in as a heavy promo push, sometimes it’s a slightly more subtle pile of hints in a free article that gently suggests that you subscribe to their premium service … today’s item for sleuthification is the latter.

Louis Basenese, who is pitching for the White Cap Report, wrote a free article in Investment U yesterday suggesting that trends in mobile banking (ie, banking with your cell phone) will bring profits to some service companies in the financial sector (that’s where the quote comes in the headline above). You can see the full article here if you’re curious, he suggests two large US companies and one Canadian company as “freebie” picks that should benefit from the move to mobile banking, mobile payments, and remote deposit capture (RDC).

The picks that he mentions as beneficiaries of the trend toward more mobile banking are Fiserv (FISV), Jack Henry (JKHY), and RDM Corp — the first two are large caps that provide a wide variety of services to financial institutions, RDM Corp is a teensy tiny Canadian microcap (ticker RC in Toronto, RDMKF on the pinks, very illiquid and only a $25 million market cap).

That’s not the end of the story, however — Basenese also tells us that he’s not, of course, telling us about his real favorite pick in this space:

“But my favorite way to play this trend is actually through a small U.S-based company. It sports a tiny market cap, despite literally creating the mobile RDC market with its patent-protected software. In addition, the top five financial institutions in the United States use its software and even online payment-processing juggernaut, PayPal, is a customer.

“The stock currently trades on the U.S. bulletin boards, but I expect it to make the jump to a major exchange in the next year, which should increase its presence and price momentum.

“Out of fairness to paying subscribers I can’t reveal the company’s identity here, but if you want to find out, sign up for a risk-free trial to The White Cap Report (we recommended the stock in our November/December issue).

“Shares are already up 40% and counting. And I’m convinced that it’s the most compelling, under-the-radar way to play what promises to be the biggest tech breakout of 2011 – the explosion in mobile phone payments and RDC services.”

So … what the heck is he talking about? We toss those hints into the Thinkolator and the answer comes pouring out quickly enough: this must be Mitek Systems (does indeed trade on the bulletin board, ticker is MITK).

Mitek is about four times as large as the Canadian RDM, but still tiny with a market cap of about $100 million. They just posted their first profitable quarter back in November, earning a penny per share (they lost four cents per share for the full year ended last September), and the stock currently trades for about 20X their sales for the last four quarters.

Since they trade at a large multiple of sales, it’s good that their basic business concept should be very high margin — they sell software, essentially, one of the great high-margin and scalable businesses if you can beat your competitors. Their particular specialty is mobile imaging, the company seems to have basically been founded on one basic idea: using the cell phone camera for something other than taking drunken pictures of your friends.

Their two main products apply that idea to online banking and smart phones: Mobile Check Deposit, which is in use and on which they were granted a patent last fall, lets you take photos of the front and back of a check to deposit it electronically without visiting the bank; and Mobile Photo Bill Pay, which was just introduced a couple months ago, lets you take a picture of a bill or invoice to process a payment electronically.

Mobile Check Deposit, their version of a remote deposit capture service, seems to be the more promising of the two offerings, at least so far — and I imagine we’ll continue to live in a world of at least some paper checks for at least a few more years, though their use dwindles every year. Heck, I’d like to be able to do this with my phone, gadget gadfly that I am, though I’m not sure it’s any less cumbersome than my current process.

I don’t know if Mitek will turn out to be a hugely profitable company in the years ahead — they have agreements with several big banks and financial services companies, and, in a promising note, they signed an agreement with Fiserv, the biggest tech services company for banks, to use Mitek’s technology in Fiserv’s mobile deposit offering to banks.

They announce a new bank or credit union customer or two every month in press releases, so each new client is apparently still a big deal — a worthwhile reminder that we’re talking about a very small sales base so far. I don’t know how much revenue they bring in from a typical client, though I assume that the actual use of the technology by consumers is probably still very limited to early adopters. They have been positioning themselves as the quality leader in this space, including with an interesting (at least for a while) white paper they released last year on the “Gold Standard” practices for RDC, but there are certainly several other providers who are selling similar-sounding technology that uses smart phone cameras (as well as more standard check scanners, like those that are probably used at your grocery store).

The shares of Mitek have climbed quite dramatically since last Fall, it looks like the White Cap recommendation probably came when it was somewhere around three or four dollars if it came in November/December, so a 40% claim of gains so far is reasonable with the stock now approaching $6 (the shares were down around $1.50 in September, before their new product and their patent grant). I don’t know if the recent enthusiasm is because of the uptick in sales — which would have to continue upticking pretty rapidly to make the price reasonable — or because folks think that the business process patent that they got for the smart phone RDC process will stand up and offer them some competitive advantage over other somewhat similar companies. Frankly, the bit of news that stands out as most compelling as far as the “story” goes is that Fiserv will be using their technology, and I don’t know that they’ve mentioned what that will mean revenue-wise (I just read a few of their filings, I didn’t listen to the conference calls or do much research beyond that, in case you can’t tell).

Basenese indicates that the company might get listed on a major exchange at some point, which tends to spur the share price higher with increased attention and liquidity (though it’s not a guarantee, particularly if the price is bid up in anticipation of an uplisting). It might be worth noting that Mitek is no stranger to the Nasdaq, this is a company that has been around for a while, and back when they were primarily known as a check fraud fighter and check digitizing company (not too different from today, I suppose, though the smart phone craze was years away), they enjoyed the huge dot com bubble. The shares got up to about $12 very briefly, but were delisted from the Nasdaq a few years later, in 2004, when they got too small (shareholder equity fell to near $1 million). They’ve since raised and spent quite a bit of money on developing their technology, and if they do become consistently profitable with these new product offerings and partnership deals you can also add on to that the good news that they won’t be paying much in taxes for a while, they’ve accumulated more than $15 million in losses over the years.

So … if you look at the balance sheet and the fact that they’ve just experienced one profitable quarter, it certainly looks expensive … but if you think that mobile check processing will be a big business, and that Mitek’s patented offering will be a strong competitor it’s certainly possible that they’ll be worth much, much more in a few years thanks to the powerful leverage that comes from wide distribution of software (they report 80%+ gross margins already — not enough to be consistently profitable with their sales expenses and fixed costs, but if the sales base expanded significantly there’s the potential for much of that to go directly to earnings).

That’s what I think about what little I know — how about you? Interested in taking pictures of your checks instead of driving down to the ATM? Think Mitek will be the winner in this growing segment? Is the price right? Let us know what you think with a comment below.


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16 Comments on "“The most compelling, under-the-radar way to play what promises to be the biggest tech breakout of 2011”"

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Just posting
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Just posting
January 26, 2011 3:23 pm

Absolutely agree with the app piece. Why right now I go to my bank and have to drive to the ATM and I wind up doing the exact same thing that your writing about through the ATM. Even advances me some cash before the check even clears…sooooo…guess this is an app-sollutely great possibility.

Adrian
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Adrian
January 26, 2011 5:45 pm

I think I must be missing something. Here in the UK, hardly any businesses accept cheques (or "checks") anymore. I can't remember the last time I received a cheque. Almost everything is done via bank transfer, debit card or Paypal. To my knowledge, the banks here intend to phase out cheques completely by 2018.

blackjack
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blackjack
January 26, 2011 10:19 pm

Google still pays by check or cheques

Delisammich
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Delisammich
January 26, 2011 11:09 pm

I have to side with Adrian on this issue. Mitek may have the go-to app for street level consumers, but realistically, how long will the check last as an acceptable instrument?

Marcus Mul
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Marcus Mul
January 27, 2011 5:15 am

As a European Gumshoe enthousiast, let me point out a possible risk for this company.
In most of Europe the whole check-thing has been obsolete for years in favor to online managing of your bank accounts and all payments. If this catches on in the USA and why not because it is cheap and so much easier, there will be no need to take pictures of checks or bills anymore.

simon
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simon
January 27, 2011 9:22 am

As a Asian Gumshoe enthusiast, let me share our side of story.
In Malaysia, cheques (checks) are still being used quite widely as not all merchants has a credit card payment processor, such as school/tuition centre/nursery/, or payment for apartment rent/maintenance fee etc. I don't foresee usage of cheques will be diminished in the next 10 years. Of course, Malaysia has a small market so it may have negligible impact even if it stop using cheques totally now.

Macca
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Macca
January 27, 2011 10:21 am
Adrian, I woudn't have thought anything to do with checks would be of value until I moved to the States 6 years ago. Checks are still very big here. And the convenience of using a check reading app rather than going to the bank is very useful – in the USA at least, That does of course beg the question, how far can they grow? Checks are virtually non existent in the rest of the world, so any growth would have to be in the USA, and would have to happen quickly because eventually the USA will go the way… Read more »
james moylan
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January 28, 2011 12:43 pm

idat

james moylan
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January 28, 2011 3:59 pm
I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about tech stocks I have a suggestion the company sanmina sci corp symbol {SANM} the company provides integrated electronics manufacturing services the company has a market cap of only 1 billion but does 7 billion dollars in annual sales the company also has 600 million dollars of cash on its balance sheet. the company went though a massive overhaul over the last 5 years. the companies earnings are exploding but this has… Read more »
Adrian
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Adrian
January 30, 2011 11:17 am

Macca. I bow to your greater knowledge of the US market. It's funny how we often think that the US is way ahead with new trends and yet sometimes it turns out that they're actually years behind much of the rest of the world. The last time I visited the US (2009), I was amazed how fascinated people had become with their mobile phones. It was like travelling 10-15 years back in time!

BPK
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BPK
February 2, 2011 4:25 pm

I'm subscribed to White Cap Report for almost 1 year and my WCR portfolio is doing good. I did sell several loosing positions but there were also a few ones with 100% profit in just a few months. So I'm taking their recommendations seriously.

mce
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mce
March 3, 2011 7:09 am

doing a little gumshoe-ing of my own – this is a great article, but the significance of the stock has been slightly overlooked – Mitek is the back door, fast-track entry for Parascript into the public markets – Mitek has the shell, Parascript has the product:
http://www.parascript.com/newsroom2/press_full.cf

Gravity Switch
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January 26, 2011 3:36 pm

Mitek does also have their own branded mobile deposit app for the apple app store, just FYI, as well as a receipt-scanning app for business travelers and a fax app. Don't know if they make any money on those

Mick1230
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Mick1230
January 26, 2011 4:46 pm

I have been in the processing business for two decades and have developed many applications for payment. Wireless devices offered by Veriphone and Waysystems are the most secure and will be the "best of breed" products that can use secure pin based debit capabilities. The payment market is still driven by merchants and PCI, so I wouldn't expect the public's ability to use a Mitek application to have much traction.in this industry. Unless you want to make money by shorting them.

jim
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jim
March 17, 2011 8:23 pm

White cap has something new and expensive ($795) called Wealthtronix that plugs in to"The Grid" and codes insider information…..is this worth checking out?

Guest
Guest
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Guest
August 13, 2011 8:44 am

Yeh, check it out for 795 and get a refund less 10% if you do not like it by 60 days. I say check it out for 10% $79.00 then buy the remainder in 60 days if you like it. save a lot of hassel trying to follow the refund rules as they stand and anyone that gets your credit card authorization has control so do not be hasty withthis issue?

Good luck,

Joe

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