Lightspeed POS (TSX:LSPD)(NYSE:LSPD) stock has staged a massive rally in 2020. Up 68% year to date as of this writing, it has handily beaten the market. Supported by stunning revenue growth and comparisons to the legendary Shopify (TSX:SHOP)(NYSE:SHOP), the company has become a real tech standout.
Lightspeed was a major Canadian IPO that bucked the trend last year. At the same time as Uber and Lyft were languishing in the markets, LSPD was soaring. Today, the gains show no signs of slowing down. The question is, can LSPD keep up the momentum?
What has driven the rally?
Lightspeed’s rally has been driven by three factors:
- Solid revenue growth (62% in Q2)
- The general euphoria surrounding tech stocks this year, which has lifted the entire tech sector
- Comparisons to other big winners like Shopify
All of these factors have plausibly driven Lightspeed’s stock price gains. Investors generally reward early tech IPOs for strong revenue growth, even when profit isn’t in the equation. They also tend to buy diversified blocks of entire sectors, which tends to create strong correlations within industries. So, Lightspeed’s revenue growth and general strength in tech have undoubtedly contributed to the stock’s rise this year. My third factor — comparisons to Shopify — is a little harder to quantify. But it has been a big factor in media and analyst coverage of of LSPD, so it has likely played a role.
Some factors that could stop it
Despite all of the things that LSPD has going for it, there are some factors that could slow it down:
- Growing losses: Lightspeed’s net loss in Q2 was $19 million compared to $10 million the year before. Investors generally expect losses in new tech stocks but growing losses are rarely seen as a positive.
- The death of retail: unlike Shopify, Lightspeed has traditionally been more focused on brick-and-mortar retail than e-commerce. This is a liability in a pandemic that is putting retailers out of business and leaving e-commerce vendors to pick up the pieces. However, Lightspeed is working to help retailers transition to digital sales, so it’s not ignoring e-commerce altogether.
Ever since its IPO, Lightspeed has been a solid gainer. As of today, that shows no signs of slowing down. While its gains haven’t matched Shopify in its early days, they’ve certainly outpaced the TSX.
The question is whether this can continue. Lightspeed is definitely a growth company that can justify a steep valuation. But with a 27 price-to-sales ratio, LSPD’s valuation is very steep. Of course, Shopify soared for years and years with even steeper valuations. The difference is that Shopify is growing revenue at 96%, while LSPD is growing at 62%. One company is clearly experiencing faster growth than the other. For this reason, I would expect Lightspeed to keep delivering positive gains in the near future, but probably not the “Shopify-like” gains some investors want.
On the topic of Canadian tech stocks...
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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool owns shares of Lightspeed POS Inc. The Motley Fool recommends Uber Technologies.