LSPD post mortem

Like many others, I read everyone’s own portfolio summaries each month and I’m extremely grateful for the sharing of those portfolios. I especially watch over the 6 or so that I find are somewhat aligned with my own picks and study those more closely.

And I noticed that this last month, 5 of investors portfolios that I am most aligned with, had LSPD at around 10% holdings (all 5, with Saul holding the lowest percentage). This was a stock that I honestly couldn’t get my arms around completely and couldn’t build the confidence in - mostly because I didn’t really understand the business, having never really invested in a business that was similar.

So I wonder if some of you who graciously and willingly posted that you had significant stakes in LSPD might be willing to post what you think you missed or what went wrong? Is there something we might learn from this?

I want to make it clear, those who post their portfolios are “putting it all out there in the open” and I respect the hell out of that and I’ve learned so much from your sharing. And several of the most respected investors (the gurus) that share their portfolios were holding LSPD. I hope you are willing to share what you feel the mistake was as well. I’m pretty sure most (if not all) of you have already done this exercise, at least in your heads!

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MFChips,

Thanks for a question. I had a 16.4% position end of last month and I’ve therefore pondered your question quite a bit already, while licking my wounds.

I believe that I made the following mistakes, in hindsight:

1) I was focused on the wrong thing. The short report had my attention and I was hell-bent on being vindicated because the report looked flawed to me. It was flawed, and in the end it didn’t matter. Because what matters are the actual numbers. I would have been better served had I spent more time looking at the business drivers and not sentiment and short seller reports.

2) There were indications of supply chain issues and that there might be trouble brewing on our board, but it did not get sufficiently discussed. You pointed out in post 80718 that the industry was in poor shape and supply chains problematic, to which there was a response that seemed to say all is well, as they run on iPads.

You wrote:

“I’d be concerned with LSPD’s growth being supply-constrained and not just for a few months. Our industry is in poor shape to fix supply-constraints in the coming months or quarters.”

But supply chain issues was part of the problem at LSPD. Being more careful next time and listening more to the opinions of industry insiders is my take-away here. As well as being very careful of businesses with a hardware component (Peloton, Inari for example)

3) I was a bit too US and EU centric in my thinking. I focused on the seemingly macro reopening tailwinds for restaurants there, but their business is global. So I missed the impact that COVID in APAC would have and relied too much on a tailwind for business performance.

4) There were simply too many big acquisitions and they always take focus away, take time to integrate, cause people issues (that was also discussed on the board and again, I did not take it seriously enough). I was not expecting the integration efforts to have a material impact, but they invariably do if they are not just tuck-in acquisitions.

5) The business had a growing and very large non-recurring revenue component, which inherently made it more risky. I expected payment penetration to increase much faster than it did, based on management’s comments a quarter ago. Recurring revenue businesses are simply better bets.

Hope that helps.

-WSM

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My hypothesis: it was overlooked that the numbers for the last two quarters looked very good compared to last year in the Corona lockdown.

After restaurants were able to reopen, sales naturally rise explosively. But that is a one-time effect.

In addition, the solutions were not developed completely internally, but were acquired through numerous company acquisitions. Very often, this kind of thing fails. Let’s compare Datadog and Crowdstrike: They also make acquisitions, but relatively small and related to the purchase of technology.

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Good question. Hindsight’s always 20/20, but I’d say it was a little bit of macro slowdown, a bit of supply chain pressure, a bit of hospitality staffing shortages, and a fair amount of miscalculation on how well acquisitions were being integrated. Put them all together and…

LSPD – After an up and down couple of months including a short report, Lightspeed had a hugely important November 4 earnings release. Rather than give a detailed breakdown of the quarter, I’m just going to cut and paste my investing diary from that morning:

5:45 am U.S. Central Time – “Man, these morning reports are frickin’ brutal… I’m glad I don’t live on the West Coast… <SLURP>… $#&%!!!.. I knew that coffee was too hot, but what choice do I have? It’s a morning release, and I desperately need the caffeine…”

6:00 am – “<refreshes screen>… Not seeing anything yet… Should I surf the web while I’m waiting? No, stay focused!.. Brrrrr, it’s chilly this morning. I really need to straighten up the garage so we can get both cars in before the snow starts flying… Wait, what am I doing up this early again?.. Oh yeah, Lightspeed earnings!.. C’mon, man, shake yourself!!.. The revenue guide is $124M but based on their admittedly limited history I’m looking for something closer to $145M with a Q3 guide of $155-$160M… Hmmm, some other retail/hospitality firms have recently mentioned supply chain or staffing issues. Should I adjust my expectations down?.. Nope, too late now. Trust the process. Besides, LSPD will likely need something in that neighborhood to hold its premium anyway… Not to mention I’m too tired at the moment to rethink it…”

6:15 am – “<refreshes screen>… Still nothing… Could I have slept in another 10 minutes?..”

6:20 am – “<refreshes screen>… There it is!.. $133.2M with a $145M guide… That seems a little, uhhhh, light… Raised the FY revenue guide by only $5M while also adding $5M more to estimated FY losses… Shoot, that’s disappointing too… Organic subscription growth fell to 58% from 78% last quarter?!?.. Oof… The market’s not going to like any of that… What’d it close at yesterday? $98.97?.. $87 now. Uh oh…”

6:25 am – “Well, there are clearly general macro and supply chain issues. Why should I assume LSPD’s merchants are immune?.. Is there anything I can check to see if the underlying business is still on track?.. I know! Customer locations and payments penetration!.. Even if softer economies are limiting GMV, location and penetration numbers should look okay if LSPD’s platform is gaining acceptance… Let’s see, <scans release> 156K customer locations… for only 4% sequential growth?.. even with all those new sales leads from acquisitions?!?.. THAT’S TERRIBLE!!.. Drifting down to $83… Oops, I just threw up in my mouth a little. At least there was some coffee mixed in…”

6:30 am – “OK. One last check. Last quarter’s payments penetration was 10% with a long-term belief roughly 50% of LSPD merchants would adopt the platform… This quarter’s penetration rate was <scans release> 11%… That means Lightspeed is on pace to reach its estimated payments penetration in <counts fingers> 39 quarters?!?.. CRAP! NONE OF THIS LOOKS LIKE THE RESULTS OF A DOMINANT GROWTH COMPANY!!!.. $81… Oh well, can’t win them all. Time to head for the exits…”

6:33 am – “OK, I own a bunch of LSPD totaling 10% of my portfolio across multiple accounts. Better sell the bigger accounts first since it looks like we’re heading down… Still holding around $81, so at least I’ve got that going for me…”

6:35 am – “Wait a sec! I just entered the sell order in the second account and the first hasn’t filled yet. What the hell is going on?.. #$%&!!!.. I placed both orders without marking extended hours. AAAARRGH!.. Dammit, caffeine! YOU ONLY HAD ONE JOB!!.. Ooh, wait. It’s back up to $82.50! Sometimes it’s better to be lucky than good…”

6:40 am – “Well, that totally sucked. At least I dumped everything in the big accounts above $80… A painful loss, but whaddya gonna do? :person_shrugging:… There’s just 2% or so of our initial shares left in our smallest account… $79 bucks… I’ll put in a limit order at $82 and see what happens. You know, price anchoring a little higher so maybe I can get one last ‘win’ to make myself feel better…”

6:45 am – “Screw it. I’m taking the $77 and calling it a day… I sure do hope Datadog and Cloudflare have better reports this afternoon… Hmmm, the market doesn’t open for another hour and 45 minutes… I’d better get another cup of coffee… Hey, did I mention these morning reports are frickin’ brutal?”

The lesson here? Sometimes when the market hands you your ass, it helps to laugh at yourself a little. Lesson learned…and not for the last time, I’m sure (https://giphy.com/gifs/brownsugarapp-lol-laughing-snickering…).

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I had more LSPD that I would like to admit. It was only a tier 2 holding for me, but it probably should have been tier 3 or tier 0.

Why I bought:

  • Fundamentally I knew too much about the traditional POS world: it was (and is) completely ripe for disruption.
  • The POS market seemed to have hit the tipping point and the “pie” seemed to be getting very big very fast.
  • A lot of traditional network effects would be at play here.
  • Unlike the traditional POS market, there did seem to be at least some value in the data.
  • I really hate to admit it to myself, but there was some FOMO (fear of missing out).

Why I should have been more cautious

  • I was investing into pandemic headwinds
  • Regardless of whether that was a “short attack” or not, it did raise some questions on how much growth was organic.
  • The total addressable market might be high, but the realistically short-term addressable market didn’t have as high of a ceiling as it needed to be. The pie had gotten big quickly, but the low hanging fruit had been picked already.

None of the “should have been more cautious” warning flags were red flags. But I have to continually remind myself of the trade-offs that I make with “Saul stocks”: that I’m buying extreme growth stocks and very high valuations. I do not have room for many cracks in the hypothesis. Lightspeed still is a decent company, by most measures, but if I’m trying to narrow things down to a universe of 5 stocks it just doesn’t make that grade.

–CH

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I think that this board will benefit tremendously if more people come forward and explain their reasoning behind buying LSPD, which, unlike UPST, remains a puzzling case.

My decision was quite dumb, in fact the dumbest since finally dedicating one portion of my port to Saul’s methods on Sep 1. Yes, in the distant past of late August 2021.

I have adopted Saul’s philosophy and re-written it for myself with minor tweaks. So this is a forever debt towards Saul. But here are all the things I managed to mess up with LSPD.

1/ Did not write a profile. I have written more than two dozen company profiles since late August, all with explanations of what a company does and a clear thesis based off product analysts’ take and the company’s goals and metrics how to track the thesis. BUT I NEVER DID it for LSPD!

2/ Did not write my Earnings Expectations file that goes along with the Profile until the night before the dreadful result. Gave me a bad vibe so had I bothered to follow my rules, I would have likely never invested.

3/ Knew very well that Q2 2021 is an exception yet nonetheless happily assumed that recovery play LSPD will keep working out in the latter half of the year. Yes, plenty of anecdotal evidence of hospitality booming etc but yeah “anecdotal evidence.”

4/ My company profile template asks for my view of the CEO and the ease of following the business. Both would have been red flags here (or at least yellow).

Basically, I went for FOMO with a “recovery play” thesis and I was deservedly handed a -29 or whatever it was by the market.

The one thing I did not mess up was allocations. My rule is up to 10% in a new company with absolute max 12%. I went for 6% with LSPD.

It would be good to hear where others went wrong while the case is recent.

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I invested because:

  • The numbers looked good
  • The go-to-market was a bit unique, and not in direct competition with Shopify (which I held for a long time and had some experience with directly). They are more focused on POS/brick-and-mortar-first and offer a more comprehensive product package which I felt targeted less technical business operators better and charged a premium to do more of the integration than Shopify stores do.
  • Acquisitions seemed to be well thought-out out to either extend capability or add customers. Sort of reminded me of MIDD and I hoped they would execute similarly in the early days and grow-by-acquisition a bit more than I might wish for most other companies. In other words I was fine factoring in a bit of non-organic growth.

As I wrote when I sold. I still like this company. I just don’t want to invest my money in them for now based on the complexity and changes this quarter brought with it. I look forward to watching the next quarter play out.

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