“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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