Sell your Lightspeed stock, this fund manager says

Canadian e-commerce company Lightspeed has been on a great run over the past month, starting with the company’s quarterly results in mid-May which beat analysts’ estimates. Then came in early June an announcement on a couple of major acquisitions. Add to that a general sense that the re-opening of economies post-pandemic will benefit Lightspeed and its focus in the SMB territory of online commerce and you get a picture of a company and stock looking pretty good.

A provider of cloud-based services for small and independent shops in the retail, restaurant and golf segments, Lightspeed’s point of sale platform manages end-to-end processes covering aspects such as inventory, loyalty, payments, product and inventory management, order management and analytics.

The company went public in March of 2019 and has been one of the more impressive Canadian tech plays in the time since, including last year when LSPD returned 149 per cent.

But so far, 2021 has been more of a slog for Lightspeed, just as it has been for many tech companies both in Canada and the US. The stock started the year at $89.84 and has twice since dropped below $70 per share. But the recent rally has taken LSPD back into the black, finishing on Friday just under $100 at $99.53 and giving it a year-to-date return of about 11 per cent.

Yet those gains might be part of the problem, however, for investors hoping to buy Lightspeed at current levels, according to Zechner.

“Despite the success of the company and the growth going forward and all of that I’d probably be more inclined if I owned it to be a seller of it, just strictly from a valuation point of view,” said Zechner, speaking on BNN Bloomberg on Friday.

“I’m probably a little bit more of a believer in what we’re seeing on the interest rate front that they will move higher and that will undermine these high-valuation growth stocks,” he said.

“When you talk about the Shopifys up here, the Lightspeeds and all the others, and similar in the United States with your Zooms and Teslas and all of that. The very high-multiple, growth-oriented stocks, with the move to reopening the economy it might take a little bit more away from some of these in online trading,” Zechner said.

Key interest rates in both the US and Canada have been under two per cent going back more than a decade, and the pandemic only served to shrink rates to near-zero levels as governments worldwide did what they could to keep economies chugging along during months-long lockdown periods.

But with vaccination rates rising and economies slowly opening up again, the fear of rising rates has caused an exodus from more growth-oriented sectors of the market, including tech, which as a segment of the stock market has so far in 2021 underperformed key indices like the S&P 500 and the S&P/TSX Composite.

For Zechner, Lightspeed’s success in recent years has been attractive to investors but has skewed the valuation too high for comfort — at least he thinks so.

“The company has done a great job and there’s growth going forward but the multiple you’re paying right now [for Lightspeed] you’re getting in excess of 20x revenue. They pale in comparison to Shopify’s valuation, but I’d be more inclined to be on the sidelines here,” Zechner said.

“But again, I’d probably not be the voice of authority on this one because I probably would have sold lower, too, and left some money on the table,” he said.

Lightspeed has used the pandemic as a period to expand through M&A, buying up a number of US companies over the past year, including more recently announcements to agreements to acquire e-commerce platform Ecwid and merchant-to-supplier product ordering company NuORDER, for $500 million and $425 million, respectively.

Speaking of the retail and restaurant sales rebound, Lightspeed CEO Dax DaSilva has said the recent growth numbers for commerce in Australia, a world leader in getting COVID numbers under control, should be insightful for Canada’s reopening.

“Fine dining might have might have slowed or was pretty dormant, but like for Australia now we’re seeing 75 per cent growth in transaction volume in this last quarter,” DaSilva said, in conversation with the Globe and Mail on June 7. “That’s an early indicator of how we see hospitality really starting to come back.”

In Lightspeed’s most recent quarter, the company saw revenue grow by 127 per cent to $82.4 million with an adjusted EBITDA loss of $9.6 million compared to a loss of $6.2 million a year earlier. The company has guided for next quarter revenue (its fiscal first quarter 2022) of between $90 and $94 million and an EBITDA loss of about $10 million.