Intellicheck: SaaS Growth Could Create An Attractive Opportunity (NASDAQ:IDN)

Intellicheck (NASDAQ:IDN) provides identity verification software for retail locations and online use cases. I believe the company could scale its revenues into good profitability, representing a possibly good investment opportunity considering the company’s current valuation. With the company’s insider buys increasing my trust in the company’s ability to grow, I hold a buy-rating on the stock.

The product

Intellicheck provides retail workstations, banks and digital use cases an identity verification software. The software relies on reading an ID’s bar code, and translating that code into verifiable data, which the platform tries to match with given name, address, age and other data.

The platform has an identifiable competitive advantage in comparison to most competitors; legacy competitors use what’s called an OCR templating method, which tries to identify a valid ID by scanning for reflections and other markers government-issued IDs have. Compared to OCR methods, Intellicheck’s method is more accurate – the company boasts with an impressive >99.9% success rate. Also, traditional OCR methods require expensive scanning equipment, costing easily over a thousand dollars per workstation. Intellicheck’s solution, on the other hand, can be integrated into any bar code scanner.

The company offers three options for clients – IDN-Portal, Portal+ and Direct. These options differ in integration, price and the hardware required for use, as seen in the company’s latest presentation:

The stock

Intellicheck has had a turbulent price history. The stock has reached a high of over $15, and a low of $1.43 in the past 3 years, with the current price being on the lower end at $2.65:

The main reason for this turbulence can be explained by the stock market’s cycle of valuing SaaS companies at extensively high EV/S ratios into 2021, eventually crashing into current, much lower levels. Also, the company has guided a high growth for a while, that hasn’t yet materialized into the numbers as the markets expected.

Intellicheck has found support for its stock level as the company’s insiders have been buying up shares most notably last autumn:

This screenshot doesn’t capture the whole picture, as the buys continued for a long period.

Financials

Intellicheck after Q1/2023 has total revenues of $16.83 million, of which SaaS revenues are $16.61 million. SaaS revenues in the latest 12 months have grown a total of 23% from previous 12 months, with the latest quarter slowly accelerating the growth into 26%. The graph shows quarterly SaaS revenues, beginning from Q1/2019:

The varying revenues on a quarterly basis reflect the company’s seasonality, as Intellicheck earns the most in Q4s and slower in Q1s. On a trailing 12 months basis, revenues have grown steadily:

Bryan Lewis has communicated that the company expects growth rates to start climbing as their newest sales team settles and starts closing new deals. The company has closed quite a large sum of new clients: these clients in the latest quarters include American Gem Society, DealerShop, a cannabis vending machine operator in Canada, over a dozen title companies, as well as Yahoo. Large deals also include a Top 5 US bank, which is still in audit.

Currently the company’s trailing 12 months EBIT stands at a negative of -$3.56 million. This loss is expected to shrink and scale into profitability, though, as the software has gross margins well above 90%. Operating costs are expected to be quite stable, as the software doesn’t need high amounts of technological investments; the only driver increasing operating costs is a growing sales team, that should translate into accelerating growth. Operating leverage is going to take effect soon, as the company has guided in a conference call that they’re targeting a breakeven EBITDA for the year 2023.

Intellicheck shows no outstanding debt, as well as cash and short-term investments totaling around $10 million, representing a very healthy balance sheet.

Valuation

The company has a market valuation of $51 million, meaning an enterprise value of around $41 million. If the company successfully grows at high rates, in my opinion the current stock price of $2.65 does not represent the earning potential of the company. The stock currently stands at a valuation of 2.42 EV/S – scaling into typical SaaS EBIT-margins would highly likely multiply the stock’s current price.

With a discounted cash flow model, we can visualize the value of the stock with a specific growth scenario. Considering a small acceleration in growth, which dwindles over the years (representing a 11% compounded growth rate over the modelled 9-year period) with a 2.25% perpetual growth, and a discount rate of 12.44%, the DCF shows a value of $4.05 per share, meaning a 53% upside to the stocks fair value from its current price:

To construct the discount rate of 12.44%, I used Capital asset pricing model to get the cost of capital:

Intellicheck doesn’t currently hold any interest-bearing debt, so I’ve put an estimate of 15 percent debt-to equity with a cost of debt of 5 percent.

On the cost of equity side, I used the United States’ 10-year bond yield as the risk-free rate. The used equity risk premium of 5.94% is derived from Professor Aswath Damodaran’s latest estimates. The stock’s beta of 1.62 is taken from Tikr’s data. Finally, the liquidity premium of 0.5% is used to count in the stock’s quite small liquidity.

Although the modelled DCF gives a fair value well above the current stock price, it is important to note that the stock’s fair value estimate varies a lot depending on the company’s future growth – with dwindling growth, the stock could not be worth its current value, or in a dream scenario is worth way more than the previous estimate:

With an 18% CAGR over the same period, the estimated fair value jumps to $9.39. With a stop in growth, a DCF doesn’t even need to be constructed – the company wouldn’t break into profitable territory, slowly bleeding its cash over time.

Risks

The company has had some recent hiccups, though. Bryan Lewis, Intellicheck’s CEO, has communicated about a headwind concerning the company’s sales team; the prior sales team didn’t perform up to expectations, and the sales team has had a major renovation twice within a couple of years. In recent conference calls, though, the CEO has been confident in the current sales team’s performance.

The CEO has also guided an accelerated growth rate for some time already, without it fully materializing. The latest quarter of 26% growth, a jump of 5 percentage points over the earlier quarter, could be the start of a greater growth trajectory though.

Closing Remarks

Intellicheck is at an important turning point in the company’s story. In my opinion, a continued growth story could mean a fruitful investment opportunity. On the other hand, though, if the sales team underperforms expectations, the company could be in for a rocky road as it hasn’t yet scaled into profitable territory.

The company’s board, mainly CEO Bryan Lewis and CFO Ishmael Jeffrey, have been buying the stock a lot in late 2022. I have been alongside the insiders, as I do have a long position in the company.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.