Lightspeed POS Inc (TSX:LSPD) has been touted as the next Shopify (TSX:SHOP) (NYSE:SHOP). The newly listed TSX tech company is drawing comparisons with one of the most lucrative growth stocks in recent years for a variety of reasons. However, stocks like Shopify are hard to come by, and setting up a comparison between Shopify and Lightspeed might be unfair to the latter of these firms. Can Lightspeed provide returns that even resemble that of the Ottawa-based e-commerce giant?
A very competitive industry
Lightspeed provides software solutions and services — mostly to companies within the restaurant business — that facilitate the payment processing process. Other services the company offers include accounting, inventory management, an e-commerce platform, and more.
Though Lightspeed conducts its operations in North America, Europe, and Australia, serving thousands of customers over a hundred countries across these continents, the firm faces stiff competition in its industry. Providers of payment processing systems and software (and other services Lightspeed offers) are abound, and while the sector is big enough for all of them to coexist, it will be very difficult for most of them to stand out from the crowd.
In order to Lightspeed to achieve the kinds of market-beating returns as that of Shopify, it will have to build a solid moat, similar to Shopify. Providers of Software as a Service (SaaS) can build a strong competitive advantage in various ways, but two of the main ways are through name recognition and high switching costs.
Once companies have successfully experimented with a software that helps them operate (and grow) their business, they will be hesitant to jump ship. This is precisely one of Shopify’s strength: merchants on its platforms have worked too hard to create a customized marketplace to easily switch to another e-commerce platform.
Another one of Shopify’s strengths lies in its ability to enable many business owners who would otherwise not create an online marketplace to do so through its unique service offerings. It’s doubtful whether Lightspeed can pull off something similar, however. Though the firm argues that the growing number of small and medium-sized businesses creates a target market for its services, Lightspeed will have to compete with other firms to land these clients.
No doubt the Montreal-based firm can indeed land many of them. But whether it can vastly outperform most of its competitors — which it will need to do in order to grow its clientele and its revenues at a rate commensurate with market-crushing returns — is another question altogether.
That isn’t to say that Lightspeed isn’t worthy of serious consideration for growth investors, however. The tech-company does have a lot going its way: a geographically diverse and growing client base, expanding service offerings that have proven their value and a positive retention rate (among others). While these are all positive characteristics, they don’t necessarily add up to the kinds of stratospheric returns Shopify has been able to provide.
Should you buy?
Since 2016, Lightspeed’s revenues have grown by 148%. While the firm isn’t yet profitable, it derives about 90% of its revenues from recurring sources. Further, the firm-wide array of services is a selling point, as it helps its customers bundle various functions into one system. It is also essential to note that none of Lightspeed’s customers account for more than 1% of its revenues.
Though the firm currently trades at a high trailing price to sales of about 31, and has been incurring mounting net losses, these are typical assets of a growth stock (Shopify is in the same boat). There are definitely good reasons for jumping aboard this ship, but those who expect it to ride the same wave as Shopify might be disappointed.
