Why Lightspeed (TSX:LSPD) Stock Dipped 46% in 40 Days

Lightspeed (TSX:LSPD)(NYSE:LSPD) stock has dipped 46% and is trading closer to its 52-week low. Is this weakness temporary or here to stay?

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It takes years to build and grow a business and just a split second to ruin it. One report from American short-seller Spruce Point has vanished Lightspeed Commerce (TSX:LSPD)(NYSE:LSPD) stock’s one-year growth. The short-seller report pointed at Lightspeed’s losses despite 16 years of operating in the business. This is no hidden fact that Lightspeed has been making losses. But the reason why the stock surged all this while was because of its revenue and gross transaction volume (GTV) growth numbers. 

Why did Lightspeed stock fall?

In September, Spruce Point’s report highlighted the high losses. Hence, when Lightspeed reported a net loss of $59.1 million in its second-quarter results, its stock dropped 31% in six days, aggravating its 40-day stock performance to a 46% dip. Is this reaction overblown? Let’s find out. 

On November 2, Lightspeed stock saw a major selloff that pushed it to the oversold category. Pomerantz law firm is investigating Spruce Point’s allegations on behalf of investors. Even if they prove correct, Lightspeed is not a bad bargain at its current price of $85. 

The company is an omnichannel platform, working its way to cater to the niche market of small and mid-sized retailers and restaurants. There is no doubt the company has a competitive platform, and the market is fast-growing. It does face competition from Shopify (TSX:SHOP)(NYSE:SHOP) and Amazon, but there is a catch.

Competition with Shopify and Amazon 

When I interviewed Lightspeed CEO Dax Dasilva in February, I’d asked him if the company plans to target large enterprises in the future. One large customer can bring significant cash flow for a lower customer acquisition cost. At that time, he responded by saying that Lightspeed wants to bring all SME retailers and restaurants on a single platform and empower them with the technology large enterprises use. 

The problems SMEs face are very different than what large enterprises face. An efficient way to grow in this fragmented niche market is to acquire smaller competitors that cater to different geographies and verticals. The company is in ongoing talks with other companies to which it finds a strategic fit. Dasilva stated that Lightspeed wants to become the Android of SME retailers and restaurants. This approach needs a lot of marketing effort, as no single customer accounts for a huge revenue chunk. Moreover, the company faces a high churn rate.

If Shopify and Amazon tap these SMEs, they might not be able to address the challenges a small retailer or restaurant faces. As long as Lightspeed maintains its niche and evolves its technology, it may thrive. Hence, Lightspeed continued to post high losses, while Shopify reduced its losses over the last 15 years. It was only during the pandemic that Shopify turned profitable.

I don’t say that Spruce Point is wrong, but its allegations have not been proven right. And even if the allegations are right and Lightspeed did report inflated figures, the stock has already been discounted for this. Despite Spruce Point’s allegations, Lightspeed took its time to respond and stated the arguments to be misleading. This shows the management’s confidence in the company. 

How to make money from Lightspeed 

If you want to make money from the current volatility, buy more Lightspeed stock at the current price and hold it for the long term. Simultaneously, short the stock for $80. If the stock falls below its current price of $84.6, you will benefit. But if the allegations are proven wrong, the stock will overcome the dip and surge past $115, representing a 36% upside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Shopify. Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Amazon and Lightspeed POS Inc.

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