Don’t bet the farm on Lightspeed POS, this investor says

Lightspeed POS (Lightspeed POS Stock Quote, Chart, News TSX:LSPD) has been a fan favourite this year in the Canadian tech sector and for good reason: potential in the e-commerce space is huge.

But investors should keep in mind the difference between tomorrow’s promises and today’s realities,
says portfolio manager Jason Del Vicario, who advises taking a small position despite the inherent risks.

“Lightspeed is a newer company, based in Montreal. They’re in the payments space,” said Del Vicario of HollisWealth, who spoke on BNN Bloomberg on Tuesday. “They don’t quite meet our criteria in terms of that history of producing returns on invested capital, so this is a little departure from the normal types of businesses that we like.”

“You know, the listing in the US is going to get more exposure and the liquidity will go up. It’s much like a stock split —maybe it gets a little bit of a short term boost,” he said. “But at the end of the day, what really matters is how the business is doing. Are they growing their earnings, are they growing their customers, are their customers staying, low churn rates, all these sorts of things that are that are important for Lightspeed to be doing at this point.”

It’s been so far, so good for Lightspeed, which splashed onto the scene in March of 2019, as the company continues to grow its topline along with total customer usage of its point-of-sale platform. Revenue climbed by 51 per cent year-over-year in its latest quarter, the company’s fiscal Q1 2021 ended June 30, with recurring software and payments revenue rising to $33.4 million for the quarter. (All figures in US dollars except where noted otherwise.)

At the same time, the company’s growth has been muted by COVID-19, which has hit Lightspeed’s customer base in the small and medium-sized business environment where it serves restaurants and retail. The company’s overall revenue for its fiscal Q1 was flat sequentially, coming in at $36.2 million versus Q4 2020’s $36.3 million. Its net loss also grew from $9.1 million a year ago to $20.1 million for the fiscal first quarter.

Yet the company thinks a page has turned in the SMB sector where businesses are now adopting a stronger online presence and using the transaction and analytics tools provided by Lightspeed.

“COVID-19 has permanently altered the way retailers and restaurateurs run their businesses,” the company said in its Q1 2021 press release on August 6. “As consumers increasingly move online, small and medium-sized businesses are finding success with Lightspeed’s omni-channel solutions –  abandoning the inadequate legacy systems that hold the vast majority of the current market in order to gain the capabilities needed to run digital strategies alongside physical ones in a simple and integrated manner.”

Lightspeed’s share price dropped hard during the early days of the pandemic but the stock has since made up that lost ground. LSPD is currently up 23 per cent for the year and up a whopping 145 per cent since its IPO last year.

The company has been expanding its business internationally, too, a move which CIBC Equity Research analyst Todd Coupland says has been helped by the variety of options available to customers such as curbside pickups, mobile wallet payment and integrations with US tech companies like Google and Stripe.

In a research update to clients, Coupland said LSPD’s latest quarter showed a “strong” financial position.

From the investor point of view, Lightspeed’s presence in the United States was given an upgrade last month when the company began trading on the New York Stock Exchange, debuting on September 11 with an initial public offering valued at US$397.7 million. The stock began at US$32 and closed its first day at $30.25 per share, although LSPD has moved higher since then.

“Many of our U.S. investors encouraged us, quarter upon quarter, to consider listing in New York,” said CEO Dax Dasilva, speaking to BNN Bloomberg.

“A good half of our customers are in the U.S. and we wanted to raise our profile even more in the U.S., given that we have such an opportunity in front of us. The whole world is moving to digital commerce,” said Dasilva.

Del Vicario said that Lightspeed could be a good fit for a small chunk of a portfolio, even though the company is still in its early stages where the business has yet to deliver positive cash flow.

“It doesn’t have as much predictability as we would like because of the lack of history, but we’re happy to own it and we see that they’re doing a lot of the right things,” Del Vicario said. “And it’s a relatively small position for us with about a two per cent weight in our balanced portfolio, so we’ll see. We’re happy shareholders at this time.”