We occasionally see company insiders sell shares to pay their massive tax bill (Facebook guru Mark Zuckerberg's 2014 tax bill hit an estimated $2 billion plus).
But Mitek Systems Inc. (Nasdaq: MITK) insiders have steadily unloaded massive amounts of stock since November - when the share price began rocketing by some 170 percent to the current ~$9 per share ... ah, yes, maybe the peak before the plunge.
Altogether in that timeframe, Mitek insiders have dumped about $9 million worth of company stock.
That's right. And that's why insider selling tops TheStreetSweeper's list of seven good reasons we think Mitek stock is poised to flip faster than Madonna in her famous on-stage nose-dive. Investors may also find other viewpoints on Mitek, the San Diego-based mobile imaging technology and software provider here.
*1. Insiders Yell: "Sell! Sell! Sell!"
Insiders' trading trigger fingers started getting itchy when the stock run really picked up speed back in November 2015:
(Sources: Company SEC filings; Nasdaq.com)
It's always a concern when company leaders start selling their stock.
But selling of this magnitude is extreme.
It could suggest that insiders may be losing faith in their company's future, may understand something the rest of us don't or may be wanting to sell at the peak before the stock breaks down.
*2. Company's Intellectual Property: Weak
A chief worry about Mitek goes straight to the foundation of its business. The intellectual property is weak.
Here's why ...
A. The company thought so little of its own IP that it withdrew its patent infringement lawsuit.
"Let 'em have it," Mitek essentially said in 2014 after dropping the lawsuit against Top Image (TISA), explaining that "the cost of litigating the case would be higher than any potential financial benefit to Mitek."
Both parties agreed to cover their respective legal costs. That was it. Settlement reached.
Top Image stated: "Mitek realized that their case against TIS (Top Image) was weak and their patent portfolio was ineffective."
B. A patent infringement lawsuit bloodies Mitek's nose - and damages a major revenue source.
Mitek and former client USAA had been battling it out in court for years.
Then Mitek suffered a major blow in mid-2014 when a federal court threw out its infringement claims against USAA.
In lockstep, Mitek's chief technology officer suddenly departed "to pursue other opportunities."
The sucker punch: Under the settlement, USAA now gets to use Mitek's check deposit software for free.
So Mitek has forever lost part of a revenue stream.
While Mitek sustains this revenue loss, the company finds itself in the midst of a growing tangle of fierce competitors all vying for the very same customers.
But first, guess who proceeded to show up Mitek? Ol' nemesis USAA ... Read on...
*3. Old Foe: The Nemesis Races Ahead
So while Mitek was licking its wounds sustained in the USAA court battle, USAA picked itself up and took a critical step in mobile banking.
In January 2015, USAA became the first major American financial institution to introduce a full rollout of facial and voice recognition on a mobile app.
So, going on two years now, USAA customers have been using their secure selfies and their voices to access mobile banking.
USAA customers may use the mobile app "with a tap of their smartphone camera and a blink when prompted (to prove they're a live person and not a photo). USAA is also giving members the option of logging in with a spoken phrase," wrote reputed trade publication American Banking.
This leads us to something bigger ... and more ominous from Mitek's viewpoint.
*4.The Big Picture: Watch The Crowd
The USAA story demonstrates the bigger picture. Much bigger.
USAA worked with Daon software to develop its product. And Daon, developer of the facial recognition and fingerprint technology, has been working with numerous large banks.
In fact, in March 2016, Daon began providing its mobile fingerprint and facial recognition technology to MasterCard. A MasterCard vice president said online shoppers can look forward to a rollout of "Identity Check this summer in the U.S., Canada and the UK.”
So here's the bottom line: Big financial institutions aren't dependent on Mitek.
Many companies are running off on their own and hiring companies like Daon to help craft their own mobile technology ... in-house.
*5. IDChecker: Over-Rated, Faces Fierce Competitors
Mitek followed USAA's lead into the ID verification space for financial institutions on May 26, 2015, with the $10.6 million acquisition of IDchecker.
Incredibly, a business that can be expected to perform only like a minor $10 million company somehow initiated Mitek's stock run-up.
As the months passed, Mitek rose from a $90 million valuation to a completely unjustifiable $292 million. The market absolutely missed vital signs of what has been growing right up in front of Mitek ... honking big competition .... and oh so gentle barriers to entry for those competitors or potential clients in this area.
Here's a snapshot of just three of Mitek's many rivals:
Bottom line: Fierce competitors are getting into this biz fairly easily and they're running all over each other to attract customers.
*6. OMG: Stock's Too Expensive
Mitek’s lofty stock price places shareholders in a squirmy, uncomfortable position. Shareholders in the stock now would be paying three times more for a company with one-quarter the revenue offered by the industry overall.
(Source: Yahoo Finance)
And Mitek stockholders who considered getting in at the recent levels would surely turn and dash away when it hits them ... they're paying triple what shareholders in comparable companies pay for earnings.
So the stock appears to be outrageously overpriced at a price-to-earnings ratio exceeding … 131!
*7. Execs: Living Like Kings
Company executives reported net income last quarter of $582,000 or 2 cents per share, according to the company filing. The company had endured two years of operating losses, finally generating net income in 2015. Indeed, Mitek has now accumulated more than $33 million in losses.
And while integrating IDchecker may increase their challenges significantly more this year than last, executives were well enough compensated in 2015 that they could have ground up hundred dollar bills to sprinkle over their scrambled eggs every morning.
Total compensation for the three company leaders is $2.8 million.
(Source: Company SEC filing)
*Insiders have unloaded over 1.5 million shares in the past six months. If insiders are selling, should investors be buying?
*Weak intellectual property.
*A damaged revenue stream, thanks to its USAA settlement.
*Big banks - potential customers - are tapping various software providers to put together mobile technology in-house ... no need for Mitek.
*Mitek is losing its first-mover advantage as fierce, nimble competitors crowd into the area ... and also advance into the company's new area of facial recognition.
*The price-to-earnings ratio exceeding 131 makes Mitek stock look absolutely outrageously expensive.
So, altogether, we think Mitek stock will bobble and stumble by about 50 percent in the near-term. Even then the company would be unlikely to justify such a high valuation.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in MITK and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].