The stock market is complex. The assets within move up and down, not just in coherence with supply and demand in their respective industries but also following the trends created by speculation. Positive speculation about a stock can send it through the roof or at least far beyond where its fundamentals and business model would have taken it.
Similarly, negative speculation and awful news have the potential to push a stock down, sometimes brutally. But there is a catch. Cold, hard facts rarely drive speculations. They are often just notions that gain momentum. But when there are stats and research to back up certain speculations, the impact can be quite significant.
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Lightspeed: A stock going downhill
Lightspeed (TSX:LSPD)(NYSE:LSPD) was once hailed as the new Shopify, and that speculation alone was enough to turn it into a robust growth stock. Between March 2019 and September 2021, which was the post-pandemic peak of the stock, Lightspeed grew about 740%. And then, it started coming down.
If the downhill movement stopped at 20% or even 30%, it would have been characterized as the correction most tech stocks went through after the post-pandemic monstrous growth. But it didn’t, and the stock is still going down at an incredible pace. It’s already 65% down from its 2021 peak, and if the pattern continues, the stock will soon hit its pre-pandemic peak levels (maxed out at $45 per share).
Lightspeed’s second-quarter results are often cited as the trigger for this downfall, but the stock started sliding in September. Likely, the September fall was simply the long-overdue correction. But it was augmented by Spruce Point Capital Management, a short-focused research firm.
The firm published a report on September 29 (as per the website) which slammed the company for misrepresenting the numbers that “magnified” its supposed potential way beyond what it can practically accomplish competing with giants like Shopify and Amazon in overlapping domains. The company immediately responded and pointed out that as short-sellers, the Spruce Report misrepresented the facts and that it would benefit from Lightspeed’s downfall.
Should you buy the dip?
Many elements in the research that puts down Lightspeed as a potential investment are worth considering. And derivative investigations, some of which indicate an inevitable downward trend in sales which stems from Lightspeed’s revenue source, the bulk of which (for the last quarter) didn’t actually come from the subscription but the hardware lightspeed sold.
Another important point from the report is the company’s secretiveness about the actual customer count, which started in 2018.
It would be a stretch to say that Lightspeed defrauded its investors. More likely, they presented the numbers that best supported their interests, and the Spruce Point report did the same. And if all that dip is doing is pushing the company down to its actual size, then yes, you should consider buying it.
Lightspeed is still a well-positioned company, and if its following quarterly report undermines the Spruce Point report, a lot of lost confidence might be restored.
Foolish takeaway
Even if you decide to buy the Lightspeed dip and add this once-great tech stock to your portfolio, it might be a good idea to wait for the “legal” dust to settle. A securities class-action lawsuit has been filed against the company in the U.S., and its verdict (especially if it’s negative) can have significant consequences for the stock.
