Recently, Lightspeed Commerce (TSX:LSPD)(NYSE:LSPD) came into the limelight for the wrong reasons, sending the stock closer to its 52-week low. You must have read about the allegations an American short-seller firm made that caused this whole fiasco. I am a fundamental investor who doesn’t focus on noise but on long-term growth prospects. I have been monitoring Lightspeed in detail since May 2020, and the company has been delivering good growth numbers.
Spruce Point Management’s detailed report presented facts that the very numbers Lightspeed is flashing are inflated.
How true are the allegations about Lightspeed?
Spruce Point report grilled Lightspeed on two grounds:
First, it alleges that Lightspeed inflated its reporting metrics like the number of customers, average revenue per user (ARPU), and growth potential. But had that been the case, it would have impacted the company’s future growth. But it continued to exceed expectations and even got listed on the New York Stock Exchange. Lightspeed has called this report misleading.
Second, it alleges that Lightspeed “…baits investors with its massive potential in its payments solution, but we believe it has not been transparent about competitive pressures and material margin decline.” Speaking of potential, the company aims to bring 50% of its gross transaction volume (GTV) on Lightspeed Payments in the long term. The company said that payments, supplier network, and a rebound in the hospitality sector would drive growth this year.
Pomerantz law firm is investigating the allegations on behalf of investors. Even if there is truth in these allegations, Lightspeed is nothing like Facedrive (TSXV:FD), which has no focused business. It is a company having hands in six different businesses and none generating significant revenue. Its acquisitions are not in sync with any business strategy or give any synergies. These short-sellers don’t target such businesses.
Lightspeed has a strong business with potential. Had that not been the case, its growth wouldn’t have attracted Shopify and Amazon.
Lightspeed’s competition from a neutral light
Spruce Point report stated, “We believe Lightspeed is crowding into Shopify’s space and will be forced to compete head-to-head with it, and new entrants such as Amazon. We believe Lightspeed will lose the battle.” Here, the point to note is “we believe,” which shows opinion.
Smart investors know how to differentiate between noise and facts. Young companies indeed face the risk of competition from market leaders, but that risk is what gives them a high growth rate as they tap the market. You can’t expect Amazon stock to give you a 140% growth rate.
Shopify is a threat to Lightspeed. The latter targets the niche market of small and mid-sized (SME) retailers and restaurants, while the former targets large enterprises as well. Lightspeed is looking to sustain alongside the two giants rather than poach their customers.
Should you buy the stock?
The Spruce Point report brought Lightspeed’s losses into the limelight. It has been 16 years since its founding, and the company is still reporting losses and making costly acquisitions. Hence, when the company reported another net loss of $59.1 million on November 2, its stock dropped 31%. This dip has brought the stock’s valuation to 23.7 times its sales per share, which is almost half that of Shopify’s valuation of 46 times.
If you look at Lightspeed’s net loss margin, it is no different than it was before. Sometimes success comes late for some companies. While Shopify grew faster, Lightspeed is still investing in scaling up operations. It aims to generate profits through the land and expand strategy, where it expands its customer base and then cross-sells products like Payments and Capital with transaction-based revenue.
One good thing that happened from the Spruce Point report is that Lightspeed stock price fell closer to its 52-week low. This is a once-in-a-lifetime opportunity to buy a high-growth stock at such valuations. Lightspeed business is scaling, and all its acquisitions are aligned to its goal to become the Android of the omnichannel platform.
Once Lightspeed clears off all allegations, it will ride a strong recovery rally.
