Clear Secure: A Winner In The Identification and Security Space?

Quick, what is your least favorite thing about flying?

If I were a betting man, I'd wager that "going through security" is probably the #1 answer to that exact question. Especially on weekends and holidays, lines to get through TSA security can stretch up to over an hour long. Recently, this has been made even worse by TSA staffing shortages stemming from the COVID pandemic.

Today I want to highlight a Green Screen stock that is working to eliminate this pain point in the airport experience.

It doesn't end there, though. While airport security has been the "killer use case" for this software-as-a-service (SaaS) platform to date, the potential use cases for it are wide and varied. Ultimately, it could help you check into your hotel room, skip the line at a stadium event, quickly validate age for restricted purchases, and much more.

Oh, and all of this in a company that remains founder-led, debt-free, and is managed to throw off loads of free cash flow? Sound good? Let's take a look at Clear Secure (YOU).

The Product

As of today, virtually all of Clear Secure's revenue is generated through annual recurring $180 subscriptions to its CLEAR Plus offering.

You may have seen CLEAR lanes in your local airport. They are secondary lines to enter into the security area. The thing is, they are far SHORTER lines than the normal ones. This is because the CLEAR lane simply has a few automated machines where you scan your boarding pass, then authenticate your identity with an iris or fingerprint scan. And... that's it! A CLEAR agent then escorts you into security. Boom! No more waiting. You could have just saved yourself 30, 45, even 60+ minutes.

You might be thinking - what about TSA Pre-Check? Isn't that the same thing? Not exactly. Pre-Check is more of a security scan benefit that allows you to get through security without removing your shoes, pulling out your liquids and laptops, etc. Sometimes Pre-Check has separate id check queues, but sometimes not. In this way, CLEAR and Pre-Check are very complimentary. CLEAR gets you through id verification faster, Pre-Check through security faster.

Customers can sign-up for the service online. This sets you up with a "free tier" CLEAR account. To upgrade to CLEAR Plus, a customer visits a CLEAR airport location. Here you can complete your identity profile by adding fingerprint or iris scan data and paying the fee. The annual subscription fee recurs until canceled.

The "free tier" is a pretty typical customer acquisition strategy used by lots of subscription-based companies. Free (the company calls them "platform") members can use the CLEAR app for a variety of services, including health-based verification (e.g. COVID vaccination status), age-based verification (buying a beer, for example), and various integrations like flight status, Uber-hailing, etc.

Lots of Optionality For Growth

CLEAR is growing revenue nicely, at a 3 year annual rate of 21% (even through COVID travel disruptions), and at over 70% in 2022. Can it keep this up?

The core airport opportunity is far from exhausted. In 2021, only 4% of TSA travelers went through the CLEAR lanes. While this was up from 2% in 2019, there is still a lot of opportunity here. The core market consists of over 30 million Americans that fly 6+ times annually, and over 90 million fly 2+ times. Putting a $180 annual fee on that population, CLEAR could be addressing a $6-8 billion market. That's quite a lot of upside from the firm's current $430 million annual run rate.

I really like the long term "optionality" in this platform. "Optionality" is simply - how many different ways could the product or service be utilized? If the answer is "a lot of different ways", then the growth opportunities are more attractive.

Clearly, biometrics-based identity verification has loads of use cases. Management has pointed out a few that it is interested in.

One is the sports and entertainment venue space. Here, CLEAR's platform can be used for vaccination checks, checking id against ticket holder (a security practice in some facilities), checking age for alcohol purchases, and so forth.

Hospitality is another. Imagine friction-free checkin at a hotel, with an automated machine using a fingerprint scan. Or even room entry systems based on id verification. Lot of possibilities here.

CLEAR's platform could even be used in place of the ever present "2 factor authentication" that sends verification codes as a text message (think of logging into your bank's website, for example).

This just scratches the surface. A consumer-level verification platform like this has lots of applications.

Two recent developments are particularly exciting. One is a deal with TSA Pre-Check where CLEAR will be allowed to market and bundle Pre-Check with its own services, receiving a fee for every new member and renewal it processes. As mentioned above, CLEAR and Pre-Check are highly complimentary. Together, they can really ease a lot of the pain in the airport security process. This program is supposed to begin by the end of 2022, and should provide a nice auxiliary stream of revenues for the firm.

Second is the launch of CLEAR's software APIs, that can be used by any third-party apps to integrate the company's id verification services. This opens up the platform's massive optionality in ways even CLEAR probably hasn't envisioned. Already, some sports teams have started integrating it into their own stadium apps. I expect the API offering to be a very "long-tail" source of revenue for the company.

Moat Potential Is Real But Unproven

We've laid out the growth potential, but how durable of a business is this?

On this question, I see some good points and some potentially concerning points.

First, the concerns. To date, this has not been a subscription business with a particularly attractive retention rate. Customer retention has ranged between 75% and 95% year-to-year, and management has stated it expects a long-term retention in the "high 80% range". That's a fair bit of churn year-to-year. It will force CLEAR to spend marketing dollars to acquire or re-acquire customers, and open them up to potential competitors.

The second concern are the tech companies competing in the biometric id verification space. Apple and Google both have robust biometric features built into their mobile operating systems that are already used for verification by thousands of apps. It does not seem an unthinkable step to expand these features into use cases that CLEAR is targeting. The tech giants have billions of dollars of capital if they want to pursue this space, and virtually everyone owns a smartphone with the capabilities necessary. This strikes me as a serious risk.

OK, now let's discuss where CLEAR may be able to build a competitive moat.

Most notably, there are NETWORK EFFECTS at play here. CLEAR didn't see their membership really take off until it had built a large enough airport network. Once at an acceptable scale, membership increased dramatically. With a large membership base, CLEAR can effectively demonstrate its value to more and more endpoints (the airports, stadiums, hotels, etc. with use cases for it).

Compounding the network effect is the exclusivity that is natural to this kind of business. How many security lines can an airport support? How many platforms will a hotel, stadium, or an app support for identity verification? The answer is "not many" - at most 1 or 2. This creates very high barriers to entry and makes the network exclusive. These are strong potential moat factors working in CLEAR's favor.

Attractive Management and Financial Profile

There is not much to complain about with CLEAR from a management or financial perspective. The company was founded in 2010 by Caryn Seidman-Becker and Kenneth Cornick, who today still run the firm as CEO and CFO, respectively. Together they control over 80% of the voting power in the company through ownership of 20% of class A (the ones you and I buy), and 100% of class B ("super-voting") shares.

Unlike a lot of early-stage SaaS companies, Clear Secure has excellent financial metrics. The company is entirely debt-free, with close to $675 million in cash on the balance sheet. Even more exciting, it is generating substantial free cash flow, throwing off over $105 million in the past 12 months, a free cash flow margin approaching 30%! Seidman-Becker always makes a point to stress the company's commitment to free cash flow generation in all investor materials.

Investors really cannot ask for any more than that.

Risks

In the context of our typical watch list stock, Clear Secure should be considered on the higher risk side. There are a few reasons for this.

First, the company is unproven. This is a firm that just IPO'd in June 2021. We have little context to base growth, cash flow, or dilution assumptions on. That makes it difficult to estimate an accurate fair value.

Second are the growth risks. Can Clear Secure monetize its efforts outside of the airport use case? If so, there is big growth potential. If not, the addressable market is pretty small.

Finally, there are the operational risks. A security breach would be disastrous. Apple and/or Google entering the market would create serious competition (although I believe there are anti-trust concerns there). Under-utilization of Clear Secure's airport footprint could lead airports to cancel contracts with them.

Conclusion

Clear Secure is an attractive Green Screen stock. There is a lot of optionality for future growth, and a reasonable expectation of network and exclusivity to build an economic moat around. Management and the financial profile are both strong. I like having at least a handful of smaller companies with the potential for more explosive stock appreciation on the Watch List.

Check out the YOU stock page for our thoughts on valuation and what a is a good price to buy at (for members).