Lightspeed POS (TSX: LSPD) has been one of the most successful Canadian tech IPOs in recent times, hitting a high $49 per share, five months after its debut. Now, despite following a strong quarter, Lightspeed is trading well below that high-water mark thanks to a bought deal and unfavourable market conditions. Trading at just $32 per share, the stock looks like a bargain at these levels, that is, if you don’t mind a few hiccups.
Strong Q3, but acquisition strategy will need time to play out
Lightspeed reported strong numbers for its third quarter, with total revenues growing 61% year over year to $32.3 million, and ahead of previous guidance.
Recurring software and payments revenues also grew 58% year over year to $28.4 million, while gross margins expanded by a whopping 18% over the same time frame.
Lightspeed also inched closer to profitability, with net losses falling to $15.8 million from $71.1 million in 2018. Although these numbers are great at first glance, there are a few gremlins under the hood.
First, the year-over-year top line growth was not entirely organic and considers two acquisitions Lightspeed closed in 2019 of POS solutions providers, Kounta and iKentoo. Second, even accounting for these two acquisitions, Lightspeed’s growth slowed down somewhat sequentially, with Q4 sales expected to grow by ~10%, down from the mid-teens.
Moreover, as far as acquisitions go, Lightspeed does not seem to have a clear direction mind. For example, Kounta is a small POS solutions provider in the hospitality industry in Australia and New Zealand, with 7,000 customers. Lightspeed paid roughly $43 million for the company, or over $6,000 US per customer.
In January of this year, Lightspeed closed yet another deal, paying ~$101 million for German iPAD based POS system, Gastrofix, and its 8,000 customers, or $12,500 US per customer. And now, with the recently closed bought deal of C$288 million, Lightspeed is apparently gearing up for even more acquisitions.
While Lightspeed’s ambition should be applauded, the company might be stretching itself too thin, especially at such an early stage. Global expansion is a lofty goal, but I would prefer the company first address the still largely underpenetrated North American market.
Of course, the hyper competitive environment facing Lightspeed is proving to be tougher than anticipated. So far, the acquisitions Lightspeed has made have not exactly been cheap, especially as there will be near-term drags on monthly average revenue per user (ARPU) as Kounta and Gastrofix make significantly less per customer than Lightspeed.
Moreover, companies like Kounta operate on more hardware (lower margin) intensive businesses, and which could tilt Lightspeed’s revenue mix away from software during the integration period.
Finally, lofty goals come with their own set of risks, and as an investor I would like a contracted multiple to account for any execution issues that might arise.
Note that Lightspeed’s customers are small- to medium-sized businesses, which are particularly susceptible to economic doldrums.
Looking at the valuation, Lightspeed is trading at 14 times forward enterprise value to sales compared to Square’s multiple of seven times forward sales, making it a very pricey stock despite the recent selloff.
For a bullish case for Lightspeed, please visit my colleague’s article here.
