Clear Secure: Stronger Travel Demand And Softer Dilution To Provide Momentum (NYSE:YOU)

Clear Secure (NYSE:YOU) is a US-based biometric identity verification company focusing on streamlining airport security. The company’s core offering is CLEAR Plus, a subscription service offering expedited airport security. Beyond airports, CLEAR Verified empowers businesses with identity verification, virtual queuing, and credential validation tools, while their free consumer app offers additional conveniences like health documentation sharing and virtual line management.

Share performance has been lackluster since going public in 2021, with a price return of merely -58% over that period. Today, the share price has been quite far from the all-time high of $58 in August 2021. CLEAR ’s underperformance continued throughout 2023 and YTD, where its share price went from $31 per share in January last year to $19.86 today, posting a disappointing 1-year return of -35.9%.

I initiate my coverage with a buy rating and a 1-year price target of $22.7, a potential upside of 14% from today’s level. I believe that CLEAR should benefit from a few catalysts in 2024. Meanwhile, risks remain minimal in my view.

Catalyst

CLEAR’s fundamentals today are decent. Though revenue growth has normalized from 70% YoY level in 2022 to 30% level today, I believe that CLEAR would probably be able to maintain a high 20% to 30% for some time. In Q3, CLEAR also posted its first quarterly net profit margin in over two years.

Despite the downtick in cash from operations due to the recent shift towards cash-based expenses to probably normalize share dilution growth, CLEAR’s balance sheet remains very strong with no debt. As of Q3, CLEAR’s cash and short-term investments were over $700 million.

In my opinion, a few moderate-to-strong catalysts may help CLEAR gain some share price momentum and maintain its fundamentals in FY 2024.

Driven by lower airfares since Q4 2023 across the US – CLEAR’s primary market – I expect the number of travelers to see a considerable increase in 2024, creating a tailwind boosting new bookings growth for CLEAR Plus. Given the high inflationary environment, various airlines have been lowering their prices to drive demand to fill planes. As I expect the macro environment to see little changes in 2024, I would expect airfares to remain at the current level, at least until Q4 2024.

The potential increase in travel demand should also help drive the adoption of a newly launched feature that allows CLEAR members to renew TSA PreCheck online or purchase CLEAR Plus and TSA PreCheck in a bundle. Since CLEAR has not yet advertised the offer, I also expect CLEAR to see even higher new member growth for FY 2024 once it decides to launch a marketing campaign. Both CLEAR Plus and TSA PreCheck services are complementary to each other. With a CLEAR plus subscription, people can get verified faster with biometrics and skip queuing in the security lane to get to the TSA checkpoint, at which a TSA PreCheck membership would help them to pass through without removing shoes or belts.

Another potential catalyst, in my view, would be Sora ID’s acquisition and integration into the CLEAR platform, which I believe may bring in revenue growth from Sora ID’s financial services clients and further bolster the CLEAR Verified revenue stream. While the management has not disclosed much information regarding how exactly synergies will be realized, I believe that there are several ways they may unfold.

First, having been a leading provider of security clearance service in a highly regulated setting such as air travel, CLEAR’s reputation should help enable stronger customer acquisition for Sora ID, in my opinion.

Moreover, I also expect CLEAR to benefit from gaining access to Sora ID’s financial service clients to help drive strategic partnerships boosting CLEAR Plus bookings growth. Partnerships with financial service partners, such as major credit card providers, appear to be one of the key customer acquisition channels for CLEAR.

In my view, the special pricing offers from these partnerships are often attractive. For instance, the partnership with American Express has allowed CLEAR Plus’ $189-a-year membership fee to be credited back to certain credit card holders, essentially waiving the enrollment fee.

Risk

One thing I would advise investors to watch closely is CLEAR’s share-based compensation / SBC level across its operating expenses. With around a 58% increase in the number of shares outstanding since the IPO, share dilution has been extensive, which I suspect may have negatively affected the share performance.

Despite the management’s commitment to realize $20 million worth of cost savings, several new major initiatives could make it difficult for CLEAR to curb spending. For instance, adding new lines to capture new booking growth opportunities for CLEAR Plus in several major airports while integrating Sora ID acquisition may put upward pressure on sales and marketing spending into FY 2024.

Valuation / Pricing

My 1-year target price for CLEAR is driven by the following assumptions for the bull vs. bear scenarios:

1. Bull scenario (70% probability) assumptions – CLEAR to deliver FY 2023 revenue of $610 million, a 39.5% YoY growth, based on the analysts’ high-end estimates. I also project CLEAR to deliver FY 2024 revenue of $761.8 million, realizing a YoY growth of 25%. I assume a forward P/S of 3x, which is where CLEAR is trading on a TTM basis. Considering the relatively softer shares dilution in my projection, a 3x P/S would appear conservative, in my opinion. Overall, this means that I expect CLEAR to be able to maintain its steady double-digit growth while achieving its 20% cost-saving target and lower level of SBC. Given the management’s comment on saving cost and optimizing SBC, it is likely for CLEAR to see a softer increase in shares outstanding in FY 2024.

2. Bear scenario (30% probability) assumptions – CLEAR to deliver FY 2023 revenue of $608.7 million, as per analysts’ low-end estimates. I also project CLEAR to deliver FY 2024 revenue of $700 million, falling short of the analyst’s low-end estimates of 19% YoY growth. Accordingly, I also expect P/S to see a correction to 2.5x, its 2023 low.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $22.7 per share, suggesting a 14% potential upside from the current price level. I give the stock a buy rating. Despite my conservative projection, especially on forward P/S and bear-case revenue growth, CLEAR still appears to offer an attractive upside.

Conclusion

Despite lackluster post-IPO performance and consistent share price depreciation, CLEAR’s diversified identity solutions and upcoming TSA PreCheck bundled offering position it for potential upside. The potential increase in a number of US travelers in 2024 due to the lower airfares may also drive bookings growth for CLEAR Plus. I give CLEAR a buy rating. My 1-year target price of $22.7 presents a 14% upside, which I believe is still relatively conservative, given identifiable minimal risk factors today.