Why I sold out of LSPD

Investment Analysis Clubs Saul’s Investing Discussions
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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

  1. The payment margin is indeed decreasing

or

  1. 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.

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I fail to conclude that payments gross margin is declining. What we see is that overall gross margin is declining because payments become a larger share of total revenue, but how exactly do you conclude that the gross margin of payments itself is declining?

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CloudL – Thank you for sharing your decision with us.

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?)

We’ve always known that payments margin is lower than subscription margin – so I’m a bit surprised that this was one of your key reasons for selling. For comparisons sake:

  • The bulk of Shopify’s “Merchant Solutions” is payments, and this business line’s gross margin on the latest quarter was 45%
  • Similarly, Square’s “Transaction-based” (i.e. payments) latest quarter’s gross margin 44%
  • Lightspeed’s “Transaction-based” gross margin is right in line, with a gross margin of 43% on their latest quarter

So, since the focus of their acquisitions have been within payments, it’s only natural that the gross profit margins decreases overtime. For a lot of investors, this is a valid trade-off when the business growing at a staggering rate like Lightspeed is. In addition, there are second-order effects to this trade-off – as Lightspeed acquires payments businesses, by nature they acquire merchants. These merchants are then onboarded into Lightspeed’s ecosystem, which is where Lightspeed can upsell them with their subscription products (which are higher-margin, of course). This is why shareholders accept the dilution and cash-declines that come with Lightspeed’s acquisition – because they are central to their flywheel.

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.

Just because the retail and restaurant industries may be slow/no growth industries, does not mean that the service providers of those industries are slow/no growth. Lightspeed disclosed that ~80% of customers in its target industries still operate using legacy systems – that’s a massive opportunity for them to disrupt! Going back to their flywheel, I disagree that payments is their only hope to disrupt, rather I see it as being used as a customer acquisition strategy to onboard new customers and eventually upsell them.

By the way, what matters is that you’re at peace with your decision – I just wanted to provide a different way of looking at some of the points that you highlighted.

-RMTZP
Please read this before posting https://discussion.fool.com/we-are-having-a-board-emergency-3492…. and visit https://discussion.fool.com/etsy39s-growth-going-over-a-cliff-34… to maximize your learning of the board

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“Retail and restaurant industries are slow/no growth industries.”

I’m in the restaurant industry.

My restaurants are up pre covid between 20% and 40%. Business is fantastic. What’s holding us back is staffing and inflation. We’ve actually had to pull tables to slow the flow, and considering in some locations closing Monday’s. People are eating out. They are spending money. My team and other restaurateurs I know are slowly opening other locations, or passing for now only because of staffing issues.

What will work in LSPDs favor is saving a restaurant money. That is needed more then ever as profits are being squeezed in every direction. The bottom line is being squeezed by rising labor costs(having to pay higher wages to keep staff), and rising inflation costs from food, to supplies, to utility bills. So if LSPDs systems can save money, cut costs, help with inventory, etc., they will be a needed and sought after resource.

Retail is slow. Look at malls. More and more malls are becoming hubs for restaurants and entertainment. Restaurants are what’s keeping malls afloat.

TMB

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Thanks all for different perspective.

As I mentioned, payment still has lots of room to grow with only 10% penetration. The decline of payment gross margin is confirmed by the data on the annual report. THe data is correct on the short seller report.

Type 2021 2020
Transaction revenue $83.00 $27.70
Cost of revenue $42.63 $9.02
Cost % 51.36% 32.56%
Payment gross magin 48.64% 67.44%

For me, the cons out weigh the pros and there are more certain opportunities to invest in.

I am not 100% right.i am still learning. LSPD might likely to sky rocket after next earning and continue go to up for next few years. That’s fine. I already have 10 other stocks and possible more exiting IPOS to come.(The problem with too many opportunities.) We can’t invest in everyone of them and shouldn’t be.

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This seems like an easy enough nut to crack; let’s forget about revenue for a second and focus on gross profit. Doing that will mute the push and pull between accelerating revenue and declining gross margins. So…

             *Q2*    Q1     Q4     Q3     Q2 
Rev         *144*   116     82     58     45
GrP          69    58     44     33     28
GM%         *48%*   50%    53%    58%    60%
GrP Seq Gr  *20%*   31%    32%    21%    27%

I arrived at the Q2 estimates using the top of the company’s guidance ($124M) and assumed a 16% beat, which is just below average of their beats for the last four quarters–which are 15%, 9%, 19%, and 25%(!).

Then I figured GM declines sequentially from 50% to 48%, as it converges on the asymptote of their payments GM%.

"But what about the acquisitions?!

That’s why I’m showing the sequential growth in gross profit. The Q2/Q1 and Q1/Q4 are organic, their last major acquisition closed last calendar year.

Yes, I admit that sequential GP growth will show a decline from 31% to 20% in the September quarter from the June quarter, but let’s recall that something big happened in the June quarter to the restaurant and hospitality industries. Some pullback from that historical step-change is warranted.

So what do we have? A company that is organically growing gross profit at 20% sequentially, which annualizes to 108% (I can dream can’t I?), with an enterprise value of $14B and will likely hit $800M in revenue over the next 12 months (forward EV/S of ~17).

While everyone has their own trading habits, I invest based on company performance, not superfluous short attacks–and this company is firing on every cylinder.

Follow the money.

Eric Przybylski, CPA

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That’s why I’m showing the sequential growth in gross profit. The Q2/Q1 and Q1/Q4 are organic, their last major acquisition closed last calendar year

Correct me if I’m wrong but from their press releases, in Q4 2021, their revenue included Upverse and ShopKeep, while in Q1 2022, they included Upverse, ShopKeep, and Vend. This means the 31% growth QoQ in the last quarter was not 100% organic.

I have calculated the organic revenue growth without Upverse, ShopKeep and Vend


             Q1   Q4   Q3   Q2
Organic rev  65.4 51.2 49.3 45.5
QoQ%         28%  4%   8.4%

Last quarter was phenomenal, no doubt. I just want to correct the number you provided.

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