Lightspeed could be a takeout target, National Bank says

National Bank of Canada analyst Richard Tse thinks Lightspeed POS (Lightspeed POS Stock Quote, Chart, News, Analysts, Financials TSX:LSPD) has some room to grow, reiterating his “Outperform” rating but dropping his target price from $90/share to $75/share in his update to clients on Thursday.

Founded in 2005 in Montreal, Lightspeed Commerce offers a cloud-based point of sale system for business, with its solutions allowing users to manage inventory, loyalty, sales, analytics and other related processes.

Tse’s target drop is the second for Lightspeed in recent weeks, as he previously lowered his target price from $120/share to $90/share in NBF’s recent Tech Sector Preview. His updated analysis comes after the company reported third quarter results but also comes amid a bit of executive uncertainty as JP Chauvet was promoted from President to Chief Executive Officer effective immediately. Chauvet succeeds company founder Dax Dasilva, who has transitioned into the Executive Chair of the Board of Directors.

“Lightspeed reported what we believe to be solid fiscal Q3 results,” Tse said. “That said, softer/in-line fiscal Q4 guidance coupled with founder Dax Dasilva moving into a new role of Executive Chairman while JP Chauvet assumes the CEO role are only adding some uncertainty given the current market backdrop for tech stocks that’s further complicated by a continuing short overhang in the name.”

Chauvet, who had been President since 2016, originally joined Lightspeed in October 2012 as Chief Revenue Officer, then became a board member in 2013. During his tenure with Lightspeed, Chauvet has been involved with many of the company’s strategic acquisitions, its listings on the Toronto Stock Exchange and New York Stock Exchange and leading the launch and growth of the Lightspeed Payments platform, as well as growing Lightspeed’s customer base.

“JP has an outstanding track record in multiple leadership positions at Lightspeed, and the Board is confident he is the natural choice to continue the important work underway across the organization and drive sustained value for all customers and shareholders,” said Patrick Pichette, Lead Independent Director of Lightspeed’s board in the company’s February 2 press release. “Meanwhile, the Board also looks forward to supporting Dax in his new role as we advance the Board’s corporate and sustainability goals, including maintaining Lightspeed’s position as an employer of choice for top talent, a global driver of positive impact and the leading technology partner for businesses everywhere.”

Tse noted a number of key takeaways from Lightspeed’s third quarter, most notably with payments as a key growth driver. The company increased its payment volume to $2.2 billion in the quarter, a 267 per cent year-over-year improvement with an implied payment attach rate of 10.8 per cent.

Going forward, the company is targeting organic subscription and transaction-based revenue growth rate between 35 and 40 per cent annually; those sectors generated a combined $144.4 million in the quarter for a 175 per cent year-over-year improvement, with 74 per cent of the growth being organic.

Though the company’s $152.7 million in revenue for the quarter was a beat on the National Bank estimate of $143.6 million and the consensus projection of $143.1 million, Tse projects a slightly softer fourth quarter of $140.3 million (previously $142.2 million), leading to a year-end financial projection of $542.1 million (previously $534.9 million) and an implied year-over-year increase of 156.3 per cent. (All figures in US dollars.)

Looking ahead to 2023, Tse now projects revenue coming in at $718.3 million (previously $715 million), implying year-over-year growth of 32.5 per cent.

In accordance with projected revenue growth, Tse expects the company’s EV/Sales multiple to drop from the reported 16.5x in 2021 to 6.5x in 2022, then to 4.9x in 2023.

Meanwhile, Lightspeed’s Q3 adjusted EBITDA also provided a beat at a $7.1 million loss compared to the $10.9 million loss projection from both National Bank and the consensus. However, Tse expects a more significant loss of $23.9 million in the final quarter (previously a $15.6 million loss), yielding a total loss projection of $45.1 million for 2022 (previously a $41.2 million loss projection).

Tse has also modified his adjusted EBITDA projection for 2023, which is now set at a $16.8 million loss instead of a $12.1 million loss. Tse’s new $75 price target represented at press time an estimated return of 150.5 per cent.

“While the headlines may do little to draw short-term performance, the underlying details in the results combined with valuation make for an increasingly attractive risk-to-reward profile for investors,” Tse said. “At ~7x EV/S under an organic growth rate that’s expected to sustain at 35 to 40 per cent, we think LSPD is also becoming a potentially compelling acquisition target.”

Lightspeed’s share price has dropped by 57.3 per cent over the last 12 months, with a 20.7 per cent loss since the start of January, including its 52-week low of C$34.59/share on January 27. Lightspeed’s price has dropped steeply since hitting a 52-week high of C$158.93/share on September 22.