This may come as a surprise for many here. I completely sold out of LSPD today. Many will not agree with my decision. That’s fine. Since I wrote a writeup about LSPD weeks ago. I have the responsibility to let the board know my change of opinion about LSPD.
I agreed with some analysts saying we should take short seller reports seriously and don’t completely dismiss them. I don’t fully agree with every claims the short seller wrote about LSPD. One thing caught my attention. He made a point that the gross margin for payment is decreasing.(Page 100) He’s fully aware as I do that LPSD payment is the key for LSPD’s upside potential. Without it, LSPD is just an average opportunity. Since it’s the main future growth for LSPD, I decided to investigate.
I looked at the total gross margin for LSPD over the years. The gross profit margin has been decreasing steadily year after year, quarter over quarter since the introduction of LSPD payment. It seems Payment margin is lower than subscription and declines as revenue increase. (Volume discount for stripe?)
What this means to me are two parts: one or another or both
- The payment margin is indeed decreasing
- The gross margin of new acquisitions is lower than the current gross margin. The new acquisitions may not be as accretive as we think.
I didn’t dig the full details but the total gross margin confirmed the margin decline. It declined quarter over quarter from 70% to 49.67% since 2020-03-31 coincided with payment service introduction at the end of 2019. (See table on page 101). Note the margin held steady at 70% in 2018 and 2019. So it seems to me the payment is a drag on gross margin. If we look at Shopify’s gross margin, it held steady at around 50% to 55%. LSPD indeed is not shopify but it’s also not square. It’s its own type.
Second reason is once a company is being dragged into a battle by activist short seller attack, its stock often takes months to recover to previous high if it recovers at all. This is an opportunity cost. I can put the money at better use. or keep in cash to wait for opportunities. I don’t want to spend a large amount of my time to prove the shorts wrong or lose sleep at night. I want peace of mind.
Third reason: One problem I have is there are too many good investment opportunities since we hold concentrated portfolios. It’s ok to be extremely picky. It’s ok to change our opinion if new information is available.
Four reasons: I think the recent revenue boost may be contributed a lot by the reopening of the economy. Retail and restaurant industries are slow/no growth industries. Once the economy is back to normal ,LSPD revenue growth may stall. On the plus side, the payment still has lots of room to grow. Payment is the only hope for LSPD. E-Commerce is a growing and large market while retail/restaurant are slow/no growth industry. If LSPD wants to get into ecommerce, it’ll compete head on with Shopify, Amazon. It’s not an easy task.
So I sold out of LPSD (13% weight). and keep it in cash. Wait for new opportunities. I don’t want to increase the cost base of existing positions. I may add if they drop below my cost. I have to control risk because I have no other sources of income and a small nest egg. This is being logical and objective, not being attached to the companies. I sold out ZM before Saul did while many still defended ZM. I hesitated on LSPD and tried to defend LSPD for just 1 day but woke up to this decision.
LSPD may do well in the future if payment revenue increases at a rate faster than the decline of gross margin. The decline of payment gross margin may bottom at a baseline value. I don’t mind missing just one temporary opportunity and have total peace of mind.