Canadian stocks began 2023 on a solid note. By mid-February, the recovery in these stocks took a pause. Worst still, several stocks reversed their gains as the management of these corporations remained cautious in the short term over pressure on consumer spending.
Take Lightspeed (TSX:LSPD), for instance. The point-of-sale (POS) platform marked double-digit gains in January 2023. However, the stock reversed most of its gains in February (down 13.34%).
Lightspeed’s management sees near-term challenges due to a weak macro environment. It’s worth highlighting that Lightspeed generates over half of its sales from transaction-based revenues. Thus, pressure on consumer spending will likely hurt this segment and take a toll on Lightspeed’s performance.
While macro headwinds will likely pressure this tech stock, the recent pullback presents an excellent buying opportunity for investors with a long-term view. Let’s look at factors that make Lightspeed a compelling investment near the current levels.
Sector tailwinds providing a solid growth platform
Lightspeed offers cloud-based tools to support modern commerce. The company focuses on small- and medium-sized businesses providing a software platform that powers the transformation of their legacy payment systems and strengthens their omnichannel capabilities.
Thanks to the digital shift, more and more businesses are modernizing their legacy on-premise payment systems. This represents a significant opportunity for Lightspeed as it continues to drive the adoption of its products and solutions.
Notably, an improvement in the economy and increase in consumer discretionary spending will help retailers and restaurateurs to modernize their POS systems and expand to new locations, driving solid demand for Lightspeed’s offerings.
Focus on profitable growth
Lightspeed is not yet profitable. However, the company announced measures to drive growth, reduce costs, and improve efficiency to achieve profitability. Lightspeed will only offer two core products to enhance its go-to-market approach. Also, it is prioritizing customers with high gross transaction volume or GTV. The move will boost its average revenue per user (ARPU) and reduce churn.
During the last reported quarter, Lightspeed’s number of customer locations with a GTV of US$500,000/year increased by 15% year over year. Moreover, customer locations with GTV over US$1 million/year grew 19%. Thanks to this, the monthly ARPU for customer locations improved by 20% to approximately US$348. Further, its subscription ARPU also showed improvement.
Lightspeed highlighted that customers with higher GTVs have a substantially lower risk of churn and offer higher lifetime value than those with lower GTVs. Notably, high GTV customers have the potential to use the company’s multiple modules, which will likely boost its ARPU and margins.
Lightspeed is also expected to benefit as it targets monetizing a larger portion of its GTV through its payment solutions. Currently, only a small amount of its GTV is processed through its payments solutions, implying solid growth opportunities ahead.
Bottom Line
While the near-term macro headwinds pose a challenge to Lightspeed, its shift in focus on growing high GTV customers, reducing cost and churn, and expanding presence within existing verticals augurs well for profitable growth. In addition, its ability to acquire and integrate companies will likely accelerate its growth.
Lightspeed stock is trading incredibly cheap. Its forward enterprise value/sales multiple of 1.2 is significantly lower than the pre-COVID levels of 15, making it an attractive investment near current levels.
