The stock of Mitek Systems (NAS:MITK, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $16.41 per share and the market cap of $700.5 million, Mitek Systems stock shows every sign of being modestly overvalued. GF Value for Mitek Systems is shown in the chart below.
Because Mitek Systems is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 23.1% over the past three years and is estimated to grow 17.32% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Mitek Systems has a cash-to-debt ratio of 9.89, which ranks better than 67% of the companies in Software industry. Based on this, GuruFocus ranks Mitek Systems's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Mitek Systems over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Mitek Systems has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $105.2 million and earnings of $0.22 a share. Its operating margin is 15.83%, which ranks better than 82% of the companies in Software industry. Overall, GuruFocus ranks the profitability of Mitek Systems at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Mitek Systems over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Mitek Systems's 3-year average revenue growth rate is better than 83% of the companies in Software industry. Mitek Systems's 3-year average EBITDA growth rate is 47.6%, which ranks better than 86% of the companies in Software industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Mitek Systems's return on invested capital is 14.71, and its cost of capital is 3.42. The historical ROIC vs WACC comparison of Mitek Systems is shown below:
To conclude, the stock of Mitek Systems (NAS:MITK, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 86% of the companies in Software industry. To learn more about Mitek Systems stock, you can check out its 30-year Financials here.
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