ClearSecure is a high growth business whose stock has done nothing but go down since it
came public in 2021 yet this company is growing like gangbusters, generating free cash flow,
and still has a huge opportunity ahead here's why we'll be buying $250 worth of this busted
growth stock for our public portfolio today. Thanks to commonstock for sponsoring today's
video as the time is recording I do not own shares of clear secure and I do not own shares
of clear secure either a stock trading under the ticker symbol Y-O-U and valued at roughly
$4.2 billion. ClearSecure's mission statement is to enable frictionless and safe journeys using
your identity. This is simple, inspirational, and optional and the company does a great job
of communicating this consistently. Using the company's technology is quite simple - you go
to the one of the terminals you fill out a few questions and the next time you go to an airport
you can use the company's technology to quickly get your identity verified which speeds up the
check-in process by using a scan of your iris and fingerprints this technology can be applied
outside of travel as well for instance ordering an alcoholic beverage at a sporting event virtually
cueing yourself in line before you get somewhere or checking into things like hotels offices or
events this is a subscription-based business so a key metric to investors to watch is total
cumulative enrollments this figure has continued to March higher over the last couple years and
currently stands at about 14.2 million it's also important to keep an eye on the cumulative number
of total uses for the platform of course using it inside of airports is the primary use right
now but that should March higher in the future and today it stands at roughly 118 million uses
since this is a subscription-based business a key metric for investors to what is net
retention and while this number might not be as high as it is for enterprise software companies
coming in at 92.4% recently this figure is very respectable there's some other things to like
as well customer acquisition costs are actually relatively low that's because clear secure's real
State inside of airports makes it relatively easy to recruit new users customer demand is
medium because as we saw during the pandemic and as we can assume would happen during an economic
downturn paying a subscription to this might fall off the Wayside in tough Economic Times but the
majority in fact all of the company's revenue is recurring in nature so turning to the company's
moat we think that clear secure has several moat categories that are working in its favor
right now the most important one for investors to keep an eye on is the network effect which
we think is medium right now but could become substantial over time the network effects here
are very clear the more people that sign up for Clear secure the more airports and stadiums want
to use this technology to verify identity we also think it's worth pointing out that there
are some switching costs involved although they are very low and that's because right now clear
secure is the only way that you can speed up the identity verification process at airports and if
you're dealing with the world's busiest airports that can make a big difference in your wait time
we also think there's an argument to be made that the company has some intangibles working in its
favor first would be the company's brand name and second would be the relationship that it has with
governments this technology has to be approved by several governments along the way and we think
that that would be very hard for a competitor to match when you add the varying levels of these
different modes together we believe that the moat is expanding over time but how do the financials
look well it's a little bit confused and they are mixed but we 've more good than bad first let's
look at Revenue growth which has been very high over the last couple years coming in at more than
35% annually gross margin here is a respectable number at 62.2% although net income looks like
a horrendous figure coming in at negative $71 million over the trailing 12 months there is
however a big difference between net income and free cash flow which has been growing and
is significantly positive right now the reason for that difference stock-based compensation companies
balance sheets in stellar shape but Returns on Capital because net income is negative is also
negative but how about management this company was founded Years Ago by two co-founders one of which
Karen seidman Becker is currently the company's CEO while we love to see that what we don't love
to see is that employees aren't enthusiastic about working at the company earning pretty low scores
on Glassdoor now that's not terribly surprising given that most of the employees work based off
of commissions and in airports and that can be a tough job but we'd love to see this move higher on
the other hand both of those co-founders who are still on board have a very high level of skin in
the game which we love to see with all insiders combined owning over one third of the company
turning to potential we do think there are low levels of optionality in the business the company
is currently very focused on identity management on airports right now but as we mentioned it could
be used at stadiums Office Buildings restaurants and more into the future the company doesn't break
out how much comes from that category right now so this is more a potential optionality as opposed to
True optionality looking ahead we think that there's a ton of room for operating leverage
to kick in moving forward especially because of that stock based compensation in terms of the
addressable Market management nor analysts really have a good beat on how big this Market could be
and a lot of that will depend upon whether or not this is adopted outside of airports but the
vast majority of this growth is organic in nature which we love to see clear secure has partnered
with TSA pre-check to integrate both of these these Technologies which could make it very easy
for consumers to Breeze through airport security in the future this partnership has been several
years in the making and once it goes through could significantly add to clear secure's mode
so how is clear secure done on the public market in a market that's down nine percent since coming
public clear secure Shares are down 31 and in terms of meeting or beating analysts expectations
it has beat those expectations in three out of the last four quarters and then the other one
it met expectations in terms of returning Capital shareholders the company does not have a buyback
program in place and it doesn't have any debt to pay down it did Issue a special dividend to
shareholders in November of 2022 however since that's not a regular dividend we're not going
to give the company full credit for that but we do like seeing that it is interested in returning
Capital to shareholders how about risks well one of the things that we want to call out is that
we think competition is actually very low clear Shakir won the battle to win valuable real estate
insight side of airports and we don't see any federal government agency allowing another company
to step in at any point in time so in terms of the biometric subscription area for airport security
we think that there is not much competition at all one risk we do want to claw as this company
has been diluting shareholders like crazy since it came public due to high stock-based compensation
as well as selling warrants to some of its travel Partners we expect that dilution rate to come down
over time but this number has been very high in the year that this company's been on the public
markets as we saw during the pandemic we know that it can also be affected by outside forces
as the number of people traveling and the number of people paying for a subscription went down
during that time frame finally while the stock has been falling since it came public the valuation is
still a little bit Rich when viewed historically so it's possible that investors like us could be
overpaying for the company's worth prospects today let's turn to how clear secure is performed in
the most recent past Revenue in the most recent quarter came in at $116 million which was up 11%
and that beat both Wall Streets and Management's own guidance earnings per share came in at $0.05
on a non-gaap basis which is a nice turnaround from the negative number reported the year ago
period what's more that figure easily exceeded wall Street's estimate of negative four cents per
share if we go ahead and look at margins there's a lot going on here all reported on a gap basis
gross margins went up that means that those agents that are recruiting people to use the service in
airports were more productive operating profits however went down stock based compensation is a
huge part of that and then because of some wonky one-time things with non-controlling interests
that have to do with the corporate structure of clear Secure net margins went down but weren't
nearly as bad as what operating margins were free cash flow during the quarter plunged to just $5
million dollars while net income on an adjusted basis actually came in at positive 8 million and
the balance sheet as ever remains perfect $607 a million dollars in cash zero debt for the fourth
quarter of 2022 management said that they now expect there to be $124 million dollars in
sales that's up 54% versus the same time in 2021 and that was better than Wall Street was hoping
for they don't provide earnings per share guidance but wall Street's expecting $0.05 per share in an
adjusted basis versus a loss of -$0.09 per share in 2021. management does not provide guidance for
the full year but Wall Street is currently expecting 69% Top Line growth to about $429
million dollars and $0.06 in adjusted earnings per share so as shareholders what will we be watching
moving forward well the first thing is bookings this means the amount of money the company has
collected for their subscription services on an annual basis the second thing we're going
to watch is net retention we want to see this figure stabilized at 92% percent and potentially
tick higher over time as the world continues to open up third we're going to keep an eye on free
cash flow while the company is losing money on a net income basis it's making money and growing its
free cash flow horde and we want to see that continue fourth we want to hear more details
about the TSA pre-check rollout it's going to be in its infancy in 2023 but this could be a major
growth driver of Revenue into the future when you add all those things together we believe that the
company's moat is stable if not widening over time in the thesis for owning the stock is on
track so had the company score on our investing Frameworks the answer there is good on mine it got
a 78 which is well into my investable category and I'm mining got an eight it's worth noting that if
glass door scores were better and if the company can prove that this can be used outside of the
airport that score would improve dramatically and when we think about the company's income statement
it's really only optimized for revenue and gross profit right now for that reason we think that
the most useful metrics to look at are the price to sales ratio the price to gross profit ratio
and the price to free cash flow ratio on a price to sales ratio clear secure stock is trading for
about six times sales that's definitely high on an ABS Loop basis compared to the rest of the market
but as you can see is relatively low in its young life as a publicly traded company gross profit has
been increasing since it came public currently clocking in at $242 million on a trailing 12
month basis when you divide that by the company's market cap at about $4.2 billion that gives us a
price to gross profit ratio of about 17. that's a high figure in absolute terms which shows that
this company is still trading at a premium we don't have a p e ratio for Clear secure right
now but on a forward adjusted basis clear secure is trading for about 91 times earnings that is
very high for any company but again this is not optimized for earnings at this point finally if
you look at the price to free cash flow ratio this company is trading at just under 25 times
that's not all that crazy given that we think this company could grow at a double-digit rate
for a long time to come so there you go that's why we will be purchasing $250 dollars worth of
clear secure stock in our public portfolio which you can see over on CommonStock if you want to
follow all the purchases that we've made click the link in the video description and head it over to
CommonStock you'll be able to interact with us and we would love to hear your thoughts about
what you think about this purchase if you leave the most insightful comment CommonStock will pay
you a hundred dollars directly for that we hope you found this video to be useful Brian's out