Here’s why Lightspeed isn’t coming back anytime soon

There certainly was a good time to be owning Canadian e-commerce company Lightspeed Commerce (Lightspeed Commerce Stock Quote, Charts, News, Analysts, Financials TSX:LSPD) but the era of bidding up tech stocks built to grow at break-neck speed is over, at least for the time being. And for portfolio manager Jason Del Vicario it’s Lightspeed’s dubious M&A record that should keep investors wary of the stock, regardless of LSPD’s currently depressed valuation.

“We owned Lightspeed. We got a little caught up in the post-COVID mania of these businesses that seemingly shot up out of nowhere,” said Del Vicario of Hillside Wealth Management, who spoke on BNN Bloomberg on Tuesday. “We purchased them around $30 and then sold them at $90 only to watch them go up to about $160. And now they’re back down to about $30 or so.”

“My sense is that they overpaid for a lot of their acquisitions. They paid for them in cash as well as in shares, so shareholders were having their interest diluted,” he said.

Montreal-based Lightspeed has cloud-based point-of-sale and e-commerce solutions for the small and medium-sized business (SMB) community, centrally serving the restaurant and retail sectors. Lightspeed’s platform covers the gamut of services including integrated payments and front and back office support.

The company has been around for a while now, having been founded by now former CEO Dax da Silva in 2005. Earlier this year, da Silva announced he’d be stepping down to pursue environmental and ESG initiatives while maintaining a leadership role with the company through an executive chair position on Lightspeed’s board. President JP Chauvet took the helm in February.

The shift at the top came as the company’s stock was in free-fall, as investors vacated growth stocks en masse starting this past November, leaving names like Lightspeed in the dust. The company was also dealing with the fallout from a short report last fall which questioned the company’s revenue potential and a pandemic-related hangover where the stock rocketed ahead in 2020 and the first half of 2021 on positive market sentiment towards tech companies that supported businesses during the COVID period, including Lightspeed, whose products were in high demand as restaurants and retail moved further into online commerce.

Lightspeed went big with a number of major purchases in a push to cover more territory in the United States. In late 2020, LSPD bought cloud commerce platform ShopKeep for $440 million and restaurant management software company UpServe for $430 million, with the two companies posting trailing 12-month revenues of $50 million and $40 million, respectively. The cash and shares deals diluted shareholder value but added to Lightspeed’s topline, which was more than doubling on a quarterly basis.

Lightspeed’s most recent financial report was its fourth quarter fiscal 2022, delivered in May, which showed full fiscal 2022 revenue increasing by 147 per cent to $548.4 million. The company’s Subscription revenue was up 108 per cent to $248.4 million while Transaction-based revenue was up 218 per cent to $264.0 million.

But LSPD’s net loss for the 2022 year was also more than a double, hitting $288.4 million or negative $2.04 per share compared to a loss of $124.3 million or negative $1.18 per share for fiscal 2021.

Del Vicario said along with the M&A question marks, Lightspeed’s difficulty in generating positive cash flow will likely keep investors at bay for a while yet.

“This company really doesn’t fit our strict criteria,” Del Vicario said. “It doesn’t have positive cash flows and it doesn’t have predictable returns on invested capital. The founder has also stepped back a little bit in terms of his involvement.”

“Investing in something that doesn’t have positive cash flows, you cannot value that in terms of providing an intrinsic value, so I have no opinion on Lightspeed other than it is not a profitable and predictable business, and we don’t own shares anymore,” he said.

Commenting on Lightspeed’s fourth quarter and full fiscal year results was Eight Capital analyst Adhir Kadve, who said the company is seeing strong tailwinds from the return of in-person retail and dining. Kadve said fourth quarter revenue of $147 million (up 78 per cent year-over-year) was ahead of the consensus and his estimates at $142 million while a Q4 adjusted EBITDA loss of $19.7 million was in-line with the Street and Eight Capital estimates at negative $20.0 million.

“All-in, we believe that Lightspeed had a strong quarter, delivering on all fronts, including customer location growth (+4,000 in the quarter), Software ARPU expansion ($132/month versus $130/month for the previous quarter) and increasing payments penetration (12 per cent versus 11 per cent for the previous quarter),” Kadve wrote in a May 20 report to clients.