What: Shares of identity verification software vendor Mitek Systems (NASDAQ:MITK) slumped on Thursday following an article on The Street Sweeper that laid out a case for shorting the stock. At 3:30 p.m. EDT, shares of Mitek were down about 15%.
So what: The bearish article lays out a few major reasons to be pessimistic about Mitek. First, insiders have sold more than 1.5 million shares over the past six months. Insider selling on its own often doesn't mean anything, and investors shouldn't jump to conclusions based on this alone.
Second, the article claims that Mitek owns weak intellectual property. Two patent infringement lawsuits initiated by Mitek that were either dropped or thrown out were cited as the basis for this assertion.
Third, according to the article, large financial institutions aren't dependent on Mitek's products, citing the case of USAA working with another company to develop its own facial recognition and fingerprint technology.
Lastly, Mitek stock trades at a lofty valuation. The company generated just $25 million of revenue in fiscal 2015 and $3 million of net income, but a surge in the stock price over the past six months has pushed up its market capitalization to about $250 million. That's a price-to-sales ratio of 10 and a price-to-earnings ratio of around 80. Despite minimal profits, the company pays its top three executives a total of $2.8 million each year, the article said.
Now what: The article concludes that all of these negative factors could push the stock down about 50% in the near term. Investors should always do their own research and make their own investing decisions, but Mitek investors should certainly explore the merit of the bearish arguments presented against the stock.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.