YOU 12.9.25
Analyst 2
For full disclosure, we have a very small position. Generally speaking, we like open-ended stories in profitable companies that have potential upcoming catalysts and maybe some secular tailwinds. This fits our bucket for that. We like profitable companies, have competent management, open-ended stories, and catalysts within a secular tailwind theme.
We think AI is a third-order secular tailwind for Clear Secure, as identifying yourself on the internet is going to become much more important. The company’s five-layer security plan, especially with ClearOne in its enterprise business, has the potential to announce more partnerships. Like the news story we saw today, there will be more of these announcements.
I'm not sure if I could convince you to be long because I’m still going back and forth on whether or not this company is a long. For me, it’s still a "show me" story to see if they start to segment out their ClearOne revenue over the next 12 months. But it might be easier to convince you that it's not a short, because there are a lot of things the company has today and partnerships that could move the stock to the upside. Whether or not they should is up for debate.
As Becker alluded to, the World Cup is coming up. They’ve also allowed people in Australia, New Zealand, Canada, and the UK to get CLEAR memberships. There’s going to be a lot of publicity in the next 12 to 18 months regarding CLEAR, alongside this general cybersecurity and identity security tailwind from AI. So I think Clear Secure is a tough name to short, especially as the short interest is a little bit elevated. That's the strongest argument I could make, rather than a long thesis.
I'd like to hear your thoughts on why it might be a risky short rather than definitely a long. I definitely am not like, "Oh, this should be a 10% position." How would you view that risk parameter for a stock like Clear Secure?
Analyst 1
How am I thinking about it on the short side? Or more talking about the AI and the tech optionality?
Analyst 2
More like how do you view companies that you're skeptical of the bull story of, but might go in the "too hard" bucket? As we saw today, there will be more positive catalysts in the future. Whether or not those are deserved is debatable, but I think it's hard to take the bear position in companies with that general price action. It's more of a trading mindset, but we take that into account on the long-short side.
Analyst 1
In the next 12 months, I feel like the management is very strong about pushing this narrative, and I think the underlying financials will trump whatever press releases or hype that they try to put out. Maybe that's naive of me, but it's still so capital-intensive. Even if you have more technology on the transportation side, you're still signing up 64% of new members with having one of those ambassadors there, so you're not going to be able to completely cut a ton on SG&A.
I also strongly feel that this business isn't the tech R&D powerhouse that it says it is. In 2024, they cut their R&D and 20% of their tech workforce. To get into this fraud-prevention AI story, they've had to make these KYC acquisitions. It’s trying to switch its business model away from its core growth engine, and it's ultimately not going to be that successful.
It's very hard, but I feel so strongly that I should get involved if we end up being right. We’ve seen that the momentum has definitely been weak up until today’s press release. Trade volumes have been low. Acquiring new customers is getting very hard. I don't think the TSA is going to be getting any worse; it can only get better from here. And with all the partnerships that have dropped, Delta selling equity stakes, and the improvements in mobile IDs, how much more can we raise prices? It's already $200 a month. I would find it hard for the vast majority of their customer base to increase anymore. The fact that so many of their customers are at these discounted rates and the Amex partnership is coming up next year worries me, and that could be a huge negative catalyst.
Analyst 2
Totally. Until today, I’ve noticed some general weakness in the price action. I think we agree on the general idea of not pursuing plans to expand into other businesses, which could distract from the core business model. I would also say that one of the reasons they're trying to expand into these other verticals is because they see what you see in the limited TAM and capital intensity of their airport business. They’re trying to scale to something that’s a little less capital-intensive and less reliant on their airport partnerships or on how much they have to pay Amex.
We're thinking of it as they're continuing to generate cash and grow year over year in memberships, revenues, and bookings. Even though that's slowing, I don't think the time horizon is short enough. We'll have enough time over the next few years for them to generate sufficient cash to act as a margin of safety for us to be sure whether or not this ClearOne business has the legs for them to pivot. Looking ahead 12 to 18 months, I don't know if this ultimate change happens where they're not able to continue to survive as a business. I think that would be very far down the line, just based on how financially healthy the company is despite its capital intensity. We'll be able to have the answer to whether or not this is just them throwing stuff at the wall and seeing what sticks, or to see if there actually is an opportunity here. Or if this is the smart thing for Becker to do—pivot away from just being the airport line-cutting business.
Analyst 1
I agree. They’ve been in sports and entertainment, the car rental, and the Health Pass since 2021. I'm surprised that none of the things that they've tried before have gotten good traction.
Do you find the management intentionally opaque in how they change the active customer count and hide the Amex partnership? There are certain things they do with information that I find make it harder for me to believe them.
Analyst 2
I didn't like them taking away their retention rate as it was going down.
Analyst 1
That just gives me room to pause. To your point, you're like, "Hey, the management is going to do what they're doing, I'm looking at the financials, and I'm fine with them kind of being sketchy."
Analyst 2
It factors into our risk-reward calculation. The market opportunity in different verticals, like healthcare, if there's even a 5% chance that they can do it, we think that our cost basis is low enough and the cash flow that the business produces is strong enough that we're not as worried. We believe the potential reward is worth the risk, and it's a short-term thing. We feel that we'll know within 12 months. I like situations where I feel I'll have a yes or a no on a company in a shorter period of time, so then you can just move on to the next one or change your mind.
I remember the original back-and-forth about the company in early 2024 was that retention rates were going down. They had this general issue of lines being longer and people not finding the subscription worth it anymore. They basically said they were transitioning to Face ID rather than fingerprint or iris scanning, and that you had to sign up for it at the airport. That's why they were saying the lines were longer.
In August 2024, they had good numbers, and the stock went from the low 20s to the 30s in a couple of weeks. That was interesting to me because I've gone back and forth on this company for a couple of years. I've understood the bear thesis, but the market seems to believe the story that there could be more to ClearOne as a business. The stock is priced as if it's not just an airport business anymore. Given the bear thesis out there, and the stock's year-to-date gain of 37-38%, that suggests to me the market is pricing in something less obvious. What do you think is driving the stock price this year?
Analyst 1
As you identified, one part of it is the optionality. People knew that our current airport system isn't working, and they knew Trump could wake up one day and just do a press release saying, "Oh, we're going to give CLEAR a big deal," or something like that. I think that ultimately played out with the TSA getting the $1 billion package for upgrades. People are excited about the World Cup. The idea is, "Oh, maybe the sports could turn profitable, or at least not be a complete cost expense." Margins have been improving.
Analyst 2
What do you think is driving the stock price here?
Analyst 1
Management has been pretty promotional. They've been out and about doing press releases. The CEO has been on multiple podcasts. They're making a concerted effort to further the idea that they're a SaaS company. I know their SG&A is improving a bit, but it feels like there are more ambassadors. The local airport in the city that I'm in, apart from just the CLEAR lanes, has all of these sign-ups and different people scattered across.
The eGates really surprised me to the upside. Anecdotally, when I go out to the airport and ask people about their experience with the eGates, it's taking people a lot longer. I don't think the technology is crazy innovative; at least in Heathrow, they've had eGates for a long time. But the fact that they were able to launch them has created a good bit of hype. Ultimately, I don't know if that changes the pricing. By having the eGates, I don't know if you can charge someone 15% or 20% more for a service that they've already enjoyed for the last couple of years and have gotten used to. I do think the eGates are something that keeps me up at night.
Analyst 2
I used them the other day. I have both CLEAR and TSA PreCheck because sometimes it feels like if you just have TSA PreCheck, that line can be long. If you just have CLEAR, that line can be long. That's frustrating because I don't know if, in 10 years, you'll have to have 5 different subscriptions to avoid waiting in line. With the eGates, sometimes it feels like I zoom through. That’s for sure.
I don't know how much I like the business's pricing power being based on that general frustration. But I've seen people, including friends, get a CLEAR subscription in line when the line is long enough. As you said, $200 a month—a lot of people get it through the Amex subscription. There have been times when I'd be like, "If I didn't have this, I'd pay double right now just because I've got to get where I'm going."