Lightspeed POS’s weaknesses have been revealed, this investor says

There are some great opportunities these days in the Canadian software space but unfortunately Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) isn’t one of them.

So says Greg Newman of Scotia Wealth Management, who argues Lightspeed is just too dependent on economic
ups and downs to be a solid choice at the moment.

The COVID-19 crisis has wreaked havoc on a number of industries with restaurant and retail being first among them, as social distancing rules have caused the temporary closure of shops across Canada and around the world.

Montreal’s Lightspeed had its IPO debut last year and has since racked up a lot of interest in its growth potential internationally, offering a point-of-sale SAAS platform for restaurants and other businesses complete with data gathering and analytics capacities.

And while the company seems to have a bright future ahead of it, the present is less rosy, as Lightspeed management itself related in a corporate update in early April.

“The current global crisis clearly continues to impact Lightspeed’s retail and hospitality customers, including their GTV2, overall demand for Lightspeed services and anticipated churn rates due to business closures,” said management in an April 8 press release. “As long as social distancing measures persist, we expect this to have a negative impact on Lightspeed’s financial performance.”

The company will report its fiscal fourth quarter earnings in May and said that it expects to show revenue coming in at the upper end of guidance delivered in early February, with EBITDA likely to be “better than the guidance provided.”

At the same time, management said it’s working to minimize the negative impacts of the current crisis “through customer-focused initiatives, such as subscription discounts and deferred payment arrangements, and cost-containment measures” and reminded investors that the company remains well-heeled with about US$220 million in cash at the end of March.

But LSPD’s dependence on a healthy economic climate to grow its business leaves the company vulnerable, says Newman, who suggests investors might want to look elsewhere within Canada’s software scene.

“Software as a Service is a great area and it tends to be asset light. And there are great companies in that space in Canada and Lightspeed was one of them. Unfortunately, it is very economically sensitive,” says Newman, director of wealth management at Scotia Wealth, speaking on BNN Bloomberg on Wednesday.

“It really is building out unique viable restaurants that are open and growing, so Lightspeed, I think that you can buy it but there are no earnings, there’s no profitability
for a while. So it really does make it a lot more speculative — and it was speculative before this crisis,” he said.

“So if you’re looking for software companies, I’d say Constellation Software, for example, OpenText, CGI or Shopify,” Newman said.

Lightspeed finished 2019 by doubling its share price to $36.00 from its debut in March, while in 2020, the stock was up about three per cent before the market started falling in mid-February. Currently, LSPD is down 42 per cent for the year.