Lightspeed is a pass right now, this investor says

It’s always nice to climb aboard a fast-moving train of a stock and catch some of that glorious momentum, but you might want to resist the urge when it comes to Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials TSX:LSPD). That’s according to portfolio manager Brian Madden of Goodreid Investment Counsel, who says Lightspeed’s lack of profitability should be a warning to would-be investors.

Lightspeed has been tearing up the charts lately, going from being basically stuck in neutral over the first half of the year to now a 75 per cent return year-to-date. LSPD was at $90 in early June and is now $157 and counting, and that return is notably head and shoulders above its fellow Canadian e-commerce company Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP) which is also up for the year but at a more modest 30 per cent.

What’s behind the momentum? Very encouraging growth numbers are likely part of the equation, as Lightspeed keeps delivering on a quarterly basis while expanding its empire internationally through M&A.

Montreal-based Lightspeed finished its fiscal 2021 in March, showing revenue growth of 127 per cent for the year, as the company’s recurring subscription and transaction-based revenue grew by 137 per cent to $75.3 million. Total revenue was $82.4 million.

The pandemic gave a boost to e-commerce-related companies worldwide, and that included LSPD, which handles point-of-sale for small and medium-sized businesses in areas like retail and restaurants. The company’s platform is touted as an all-in-one solution for businesses making their digital transformations, something a lot of companies were keen on doing over COVID-19 and its work-from-home environment.

“Fiscal 2021 ended up as one of the most transformative years yet for Lightspeed, with the Company announcing three landmark acquisitions, launching a series of new offerings such as Lightspeed Capital, eCommerce for Restaurants and Order Ahead, listing on the New York Stock Exchange and delivering innovative strategic initiatives such as Supplier Network and the recently announced integration of Google tools directly into the platform,” said the company in its fourth quarter fiscal 2021 press release in May.

Lightspeed’s first quarter 2022 showed even better results, however, with revenue growing by a huge 220 per cent year-over-year to $115.9 million, while recurring subscription revenue grew by 115 per cent to $49.9 million and transaction-based revenue grew by a whopping 453 per cent to $56.5 million. (All figures in Canadian dollars except where noted otherwise.)

But those strong topline numbers have been paired with perhaps just as noteworthy losses for LSPD. The fiscal Q1 2022 sported a net loss of $49.3 million, which was more than double the $20.1 million loss from a year earlier. 

And it’s those continued losses that trouble Madden, who spoke about Lightspeed in a BNN Bloomberg segment on Friday, saying that investors who were fortunate enough to be buyers of Lightspeed earlier on might want to think about taking some profits.

“This company went public, believe it or not, at $16 around March of 2019 and trades just shy of $160 now, so it’s almost a 900 per cent return since the IPO,” says Madden, senior vice president at Goodreid. 

“My suggestion is, thinking always about risk management portfolio construction, whenever something goes up 500 per cent you want to take a look at it holistically in the context of your overall portfolio and consider what weight it holds amidst all the other securities that you might own,” he said.

“And if it’s getting to an uncomfortable level — and for us that’ll be ten per cent within an asset class and probably more like three, four or five per cent across a multi-asset class portfolio — we’d counsel taking profits and locking in some of that gain and diversifying elsewhere because this is a stock that can have big fits and starts. Mostly they’ve been one way but it won’t always be that way,” Madden said.

Last month, Lightspeed stocked up for some further acquisitions by issuing shares, offering up about 8.86 million shares at US$93.00 per share for gross proceeds of $823.5 million. The company said it would be using the money to strengthen its financial position and to help with its growth strategies.

But Madden cautions that the valuation for Lightspeed may be getting out of hand.

“We wouldn’t commit fresh dollars to it today, not just because at any given moment there is risk of a pullback but also because it’s priced for perfection. It has done extremely well and revenue growth has been sensational but yet profits are nowhere in sight,” Madden said.

“They haven’t turned any profits and we’re not foreseeing [them] to turn a profit in the next year or two, and so that would be concerning to us. And at 20x or more of sales, the valuation is very demanding, so we’d certainly counsel taking profits, at a minimum, and for our own clients we’re avoiding it altogether for those reasons,” he said.