YOU : POSITION TRADEClear Secure: Talk About A Bullish Economic Moat
• Clear Secure is capturing strong demand for its identity verification platform as a service to save time at security checkpoints.
• Partnerships with airports, airlines and even the Transportation Security Administration highlight competitive advantages to drive growth.
• An outlook for accelerating earnings can send the stock higher.
• Looking for a helping hand in the market? Members of Conviction Dossier get exclusive ideas and guidance to navigate any climate.
Clear Secure, Inc. (NYSE:YOU) offers a secure identity verification platform. If you've recently traveled through one of 46 major airports, you'll likely have seen the "Clear" checkpoints as a separate lane in the security process. Clear Pass focuses on the ID verification side of the airport screening process. The other step is the actual security area where travelers and carry-on luggage are checked for contraband.
With the company's history going back more than a decade, the game changer now is a belief that the operation has finally reached a critical mass with enough locations where the service can make sense to a wide range of travelers. This concept is related to the network effect where the value of the service grows as its user base expands.
Furthermore, the platform is being utilized in other applications where security screening is a requirement and there is room to capture efficiencies in the process. Members of Clear Plus also have the option to use the features at entertainment venues and stadiums where a security line often forms.
Clear also offers a Health Pass which gained prominence during the pandemic with validation of COVID testing results and digitization of vaccine status that many types of business in certain areas embrace. Notably, this feature now integrates with Apple Inc.'s (AAPL) "Health App".
YOU Key Metrics
YOU released its Q3 earnings in mid-November with EPS of $0.05, which beat estimates by $0.05 as consensus was looking for a flat result. Revenue of $116 million climbed by 72% year-over-year, with the strength largely driven by the recovery of the airline industry compared to pandemic disruptions at the start of 2021. Management notes success with in-airport and various partner channels driving memberships captured in a climbing number of bookings along with retention of customers.
On the financial side, keep in mind that there was a GAAP loss of -$65.6 million although this mostly reflected share-based compensation and the timing of the vesting from previously issued warrants. More favorably, the underlying shift towards profitability is evidenced by the adjusted EBITDA measure which reached $11.9 million compared to negative -$14.5 million in the period last year. The company also reported a positive free cash flow of $5.3 million.
The expectation is that earnings will maintain this more positive momentum going forward. For Q4, management is guiding for revenue of around $124 million, implying a growth rate of 54% compared to Q4 2021, and up 7% on a quarter-over-quarter basis.
Finally, we can mention Clear Secure maintains a solid balance sheet, ending the quarter with $700 million in cash and cash equivalents against effectively zero long-term financial debt. The position is strong enough that the Board of Directors declared a special $0.25 dividend which was paid in December.
Are There Risks?
The key for the company will be to maintain the pace of signups for new members while finding success in international markets. Longer-term, Clear Secure will need to become the global standard for secure identity verification not just in travel, but also leisure, and other industries with a visible presence in more and more countries as part of the bullish case.
The other side to the discussion would be the risk that growth simply begins to disappoint while the expected earnings fail to materialize. One concern is that the company may have already captured the "low-hanging fruit" of hard-core heavy business travelers where the Clear Pass makes the most sense, at least from the U.S. market. By this measure, doubling the number of cumulative platform users from here will be more difficult.
There is also an argument that if "everyone" is using Clear/TSA PreCheck, it begins to defeat the purpose of a priority security lane membership. It's not there yet but could become a problem at certain airports if the platform is too successful. Going further, a skeptic would also point to the regulatory risks where the service no longer becomes viable based on changing laws in the future or even in a scenario of a headline-making failure in the system that would undermine confidence in the company's security protocol.
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Dan Victor, CFA, Seeking Alpha, Jan. 05, 2023 3:19 PM ET
