Unflattering LSPD Article

Investment Analysis Clubs Saul’s Investing Discussions
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The Globe and the Mail released a piece today entitled, “Shareholders should look to lock in gains on Lightspeed shares amid competitive pressures.”

The article is behind a paywall on my laptop, but readable on my phone so I don’t know what the heck is up, but it doesn’t seem to really land any solid blows, downplaying growth. In summary…

  1. Considered the short report “Hard to digest” and basically a throw-everything-at-the-wall hit piece, but didn’t like how management referred to Spruce’s “numerous important inaccuracies and mischaracterizations” without pointing out what those inaccuracies were. That bugged me, too.
    2)The POS hardware - used to have 20% margins. Now they’re losing 20% on it. This has eroded the company’s overall margins to pre-pandemic levels. (Me: Is this like SQ giving aware their toggles? That would be a good move, not bad, locking in customers. And even though operating margins are lower, revenue soared over 200%, right?)
  2. Making expensive acquisitions to win new customers at any cost.
  3. Too many brick-and-mortar customers. “The economics of ecom sellers, as measured by revenue per location, are less compelling than those of its bricks and mortar retailers.” - quoting a report from Veritas Investment Research, another Canadian firm who has written negatively about the company.
  4. Competition with Shopify
  5. Valuation

“Looks like a company racing to adapt to the future rather than powerfully charting its own course.”

https://www.theglobeandmail.com/investing/markets/inside-the…

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Try this link, FallingWallenda, and here are 3 paragraphs underlining your summary points 2-5:

https://tinyurl.com/phcwnbpc

In Lightspeed’s own numbers, interestingly, are some data highlighted by Spruce Point that speak to the broader issue of what Lightspeed will face by taking on payment processors, Shopify and even more competitors. As recently as six quarters ago, Lightspeed reported 20-per-cent profit margins on hardware sales – the equipment its customers use to run the point-of-sale systems. In its most recent quarter, it reported a 20-per-cent loss on hardware. That’s a downward swing of 40 percentage points in a year and a half.

Lightspeed boosters dismiss this as irrelevant for a cloud company and part of the overall plan to win new customers. But here are two points that should make investors wary. First, the losses in hardware sales have eroded the company’s gross margins, which are worse than prepandemic levels. That’s blunted the advantage it’s shown from adding more revenue to its fixed selling costs. Lightspeed has tripled its revenue over this period, but its operating profit margins are only slightly better than in early 2020.

And secondly, the hardware losses speak to the rapidly changing environment for Lightspeed. The company is doing expensive acquisitions to improve its capabilities to win new customers in e-commerce as well as serve its existing ones as they make the online shift. The economics of its e-commerce sellers, as measured by revenue per location, are less compelling than those of its bricks-and-mortar retailers – but Lightspeed, as Toronto’s Veritas Investment Research observes, isn’t disclosing the mix of e-commerce sellers versus bricksand-mortar retail locations.

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On other news, LSPD launched its platform for restaurants. That is a crowded space, but innovation can create a breakthrough. Heck, the whole POS industry is crowded, but LSPD is making a dent regardless. It seems they recognize the competition is fierce, are trying to win some eCommerce customers through acquisitions (right strategy IMHO, you can’t scale from zero in the space, tough fight though, with giant competitors), and continue executing. I stopped adding and I’m paying attention to every piece of news.
https://seekingalpha.com/news/3752766-lightspeed-commerce-la…

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The same reporter (David Milstead) wrote a similar article in November 2019, questioning Shopify’s valuation.

He quoted an analyst who praised the company for their execution, for meeting the customers needs, but went on to say there was competition on the horizon, and questioned the TAM assumption most investors had, and said Shopify could only capture a quarter of it, at best.

The analyst said the stock was worth $275 USD (at the time, it was trading around $300 USD).

Less than two years later, it’s trading at $1400 USD.

Mr. Milstead questions the valuations of stocks that appear over-inflated. I’m not sure if he factors in the long tail of SaaS revenue.

I wish Lightspeed had responded more forcefully, but maybe the best response is will be an earnings report that blows past estimates (November 4th - 3 weeks away).

The Shopify article (probably paywalled):

https://www.theglobeandmail.com/business/article-whats-it-re…

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The same reporter (David Milstead) wrote a similar article in November 2019, questioning Shopify’s valuation.

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The Shopify article (probably paywalled):

- HiTechGuy.

Very good catch, HiTechGuy.

Someone archived it on the wayback machine.

Yeah, you’re correct Milstead doesn’t seem to understand SaaS stock valuations.

https://tinyurl.com/fpmr3v5e

DAVID BERMANINVESTMENT REPORTER
DAVID MILSTEADINSTITUTIONAL INVESTMENT REPORTER
PUBLISHED NOVEMBER 8, 2019
UPDATED NOVEMBER 8, 2019

Yet even though Shopify’s share price has declined by more than 25 per cent since its peak this past August, the stock remains very expensive. The company has never turned a profit, and isn’t expected to in 2020, so there’s no way to value Shopify on its earnings. And investors are paying more than $20 for every dollar of sales Shopify records – which is more than twice the price-to-sales multiple for many other well-known growing tech companies.

Some analysts look at that lofty valuation and wonder whether Shopify can grow as quickly or as large as the stock price suggests it must – particularly if the company can’t win over big corporate customers that might be able to develop their own systems, or can’t compete with social media platforms, such as Instagram or Pinterest, that are adding e-commerce functions for online retailers.

“Any sane person would say, ‘Can this company really grow revenues that fast for that long?’ Morningstar analyst Dan Romanoff said in an interview. “There’s not a lot of companies that have that kind of track record, to say that there’s a precedent out there for that.”

And here’s the analyst Money Shot you mentioned, HiTechGuy, when you said, “He quoted an analyst who praised the company for their execution, for meeting the customers needs, but went on to say there was competition on the horizon, and questioned the TAM assumption most investors had, and said Shopify could only capture a quarter of it, at best.”

p.s. I love the reply $SHOP gave the doubters back then:

“By any measure, it’s ahead of the competition. It is the platform of choice for entrepreneurs, small businesses and increasingly larger businesses to launch their e-commerce operations. And we have no issue with that,” Chris Silvestre, an analyst at Veritas Investment Research, said in an interview.

In a recent research report, however, Mr. Silvestre questions whether people are overestimating Shopify’s potential customer base, referred to in financial-speak as the “total addressable market.”

In a recent investor presentation, Shopify says it regards that total market as “anyone who wants to make more money from their site than what they pay for it.”

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