Innovative Airport Technologies And Member Perks Set To Skyrocket Revenue And Member Satisfaction

Key Takeaways

• Implementation of facial recognition and lane technologies aims to improve efficiency and member experience, potentially driving increased revenue through higher membership.
  
• Expansion strategies, including CLEAR Perks and strategic price increases, focus on enhancing member value and ARPU, aiming for higher retention and financial growth.
  
• Execution risks in innovation and expansion, alongside financial strategies, may significantly hinder Clear Secure's growth and profitability.

Catalysts

Operates a secure identity platform under the CLEAR brand name primarily in the United States.

• The rollout and enhancement of Clear's lane of the future and face recognition technology are expected to significantly reduce verification times by up to 30%, improving efficiency and member experience, which can drive increased membership and revenue growth.
  
• Expansion of CLEAR Perks, including exclusive benefits like expedited passports and lost item rescue services, aims to enhance overall member value and satisfaction, potentially leading to higher retention rates and an increase in new member acquisitions, impacting revenue positively.
  
• Clear's anticipated formal airport innovation campaign to improve infrastructure and technology at American airports through public-private partnerships could lead to enhanced customer experiences, potentially increasing memberships and further solidifying Clear's market position, positively impacting earnings.
  
• The introduction and expansion of TSA PreCheck enrollment through Clear at 46 airports, up from 3 at the quarter's start, with plans for further location expansion both inside and outside airports, are likely to attract new customers and drive incremental gross profit, positively affecting revenue and earnings growth.
  
• Implementing strategic price increases for CLEAR Plus and family pricing, along with reduced historical discounting and the introduction of new performance indicators like CLEAR Plus gross dollar retention, are meant to drive average revenue per user (ARPU) and margins, contributing to overall financial growth.

Assumptions

• Analysts are assuming Clear Secure's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 17.0% in 3 years time.
• Analysts expect earnings to reach $172.5 million (and earnings per share of $1.33) by about October 2027, up from $72.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.9x on those 2027 earnings, down from 45.8x today. This future PE is lower than the current PE for the US Software industry at 38.5x.
• Analysts expect the number of shares outstanding to decline by 2.36% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Risks

• There is risk associated with the execution of their airport innovation campaign and public-private partnerships, which could affect future revenue streams if these initiatives do not drive the expected member growth or retention.
  
• The introduction of the CLEAR Perks could impose additional operational costs and complexities that may not be fully offset by increased member retention or acquisition, potentially affecting net margins.
  
• The company's ambitious goal to grow towards 50 million members by 2025 implies significant execution risk in scaling operations, maintaining service quality, and dealing with increased competition, which could impact earnings if growth targets are not met.
  
• The incremental operating income and EBITDA margins improvement strategies hinge on the successful ramp-up of recently launched airports and TSA PreCheck, where any setbacks could direly affect profitability.
  
• CLEAR's strategy to increase share prices through stock repurchases may not align with actual free cash flow generation, especially considering the expected negative free cash flow in Q3 due to a substantial repayment to a credit card partner. This financial management approach may impact net earnings negatively if projected cash flow improvements do not materialize as expected.

Valuation

• The analysts have a consensus price target of $27.38 for Clear Secure based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $172.5 million, and it would be trading on a PE ratio of 24.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of $35.49, the analyst's price target of $27.38 is 29.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.