Chit Chat Stocks - Lightspeed (LSPD) | Fundamental Analysis

Episode Date: October 18, 2020

Your hosts Ryan Henderson and Brett Schafer analyze Lightspeed. Lightspeed provides a point of sale, POS, software to small and medium sized businesses. Their current markets are retailers, restaurants and golf courses. Ryan and Brett compare the Lightspeed to Square (1:43). Catch Brett and Ryan after the break (8:22) where they discuss what moats Lightspeed might have. Watch this episode on YouTube: https://youtu.be/Ye5r0o2WfHw Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett. https://www.chitchatmoney.com --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Restrictions apply. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

share. Now, please enjoy this episode. All right, we are rolling. This is the Fundamental Analysis Show on Chit Chat Money, and today we are talking Lightspeed. That might sound like some sort of VC firm, but it is actually a payment processor for small businesses. Yes, if you're thinking of Square, they're very similar, so Ryan is going to get into what they do and then the history of the stock and the company. Lightspeed provides a cloud-based commerce platform that helps power small and medium-sized businesses all around the world. So their primary focus is really restaurants and retail and apparently golf. Golf, yeah. I think they made an acquisition in golf, so they may have some sort of like special product for them. Interesting,

okay. But they're offering an all-in-one point of sale system. That is what they've been selling on their website essentially. And the system allows them to sell across channels, manage operations engage with customers accept payments and grow uh small and medium-sized businesses they have 77 000 worldwide customer locations every time someone swipes they take 2.6 percent and 10 cents um i don't want to overdo it on how complicated the business is because they are basically the retail side of square i mean and even in their investor relations page look the same um they try to have the sleek fire logo it felt blatantly plagiarized you know on every square earnings like whatever presentation they have some picture that's like supposed to be diversity

with like their device in it yeah that's exactly what lightspeed was doing yes it was actually like it's almost like a word per word copy um but that doesn't mean they're a bad business so i guess what do you get next history here yeah lightspeed was founded by dax da silva in 2005 in montreal canada da silva is still the ceo and their headquarters are still in montreal canada the company was initially founded to bring the and i'm putting this in air quotes apple store experience to retailers i'm not really sure what i don't know what that means but they might have pivoted so good for them yeah hopefully they did um in 2012 lightspeed receives a uh received a 30 million dollar investment round led by excel partners that's a lot for an investment round um

and they've acquired a few small companies since interesting note though 2018 they brought in former google cfo patrick pichette no that's a big name but google's history of capital allocation um has been a little poor so i don't know is that even a red fly because of the other bets and stuff like that i don't know but i mean it it's a big deal of google big big time name there um yeah good on them uh and then they ipo'd in september so basically a month ago wow oh i didn't know it was that uh early double check that but i think you might actually i think you might have been looking at maybe the u.s exchange versus the canadian exchange or something like that uh you talk valuation i'll look yeah okay so valuation enterprise value 3.57 billion uh

ticker is lspd which makes me think it's a police department like louisville state police department or something like that price is 35.68 as of our recording date on october 15th 2020 ev to sales 26 ev to gross profit of 43.3 and margin adjusted ev to sales which is ev divided by gross margin and sales growth that is 85 and they're unprofitable so those are really the three numbers we look at uh the balance sheet looks fine they had a tiny bit of long-term debt a lot of working capital uh i mean there's nothing really concerned there on the value you know the valuation you're really looking at that sales multiple especially with how unprofitable they are uh one question though have we noticed that there's been a lot of higher margin adjusted

ev to sales lately yeah i mean multiples are higher they are in these unprofitable businesses no yeah no secret um yeah i mean if you're looking at an unprofitable unprofitable business you're looking essentially at the revenue multiple maybe the gross profit multiple and then it's earnings capacity so if they got rid of all how much of it is early expenses that doesn't carry with them as they scale so you can kind of take a gander take a guess at what operating margins would look like eventually yeah that's the whole reason we do that and did you find the trading stuff because i got it here yeah new york stock exchanges that was uh the ipo on the new stock exchange in september but prior to that i think they're only on the whatever the canadian

one is the toronto one yeah because i've seen here on koi finn that it's back all the way in october of 2019 so either way it's pretty new yeah um earnings first quarter revenue was 36.2 million up 51 year over year recurring software and payments revenue was 33.4 million so and that was up 57 that's makes up it looks like 90 roughly of the top line which is a good sign and then they had 60 gross margins that's actually decreasing as they scale not always a good sign but really you're paying attention mostly to the gross profit number there as opposed to just strictly gross margin am i getting that right yeah yeah and they stated that they with their new products the light speed payments thing that's going to be their in-house payments thing which is

similar to Square, that's going to decrease their gross margin. If you look at Square or any other similar platform that does this type of stuff and has their own payments thing, the gross margins are more like 45%, 50%-ish. That should decrease over time, but that's because they're expanding their business into new revenue streams. Okay. Then they had an operating loss of $22 million for the quarter and a net loss of $20.1 million. That was on $36 million roughly in revenue they had negative 6.4 million in operating cash flow negative 7.4 if you include some stock-based compensation acquisition related costs they had around 200 million cash and cash equivalents their gross volume essentially which is basically just uh it's gtv on this which i

don't totally it's the same transaction volume yeah it's the same as gmv yeah um that was 23 billion for the last 12 months. Other notes, research and development made up about 35% of their total operating expenses. That was the highest expense by far. So all in all, I don't know. It's hard to gauge because you can't really tell. What you're going to look for here is the qualitative side of the customer retention, right? You want to be able to see what are they doing that's allowing the customers to come back over and over, how much of it is recurring that way you can sort of gauge at scale what profitability will look like if you're just looking at this just face value yeah it's not great earnings but it's

growing fast right i agree i agree all right we're going to take the ad break and then get back for the second half of the show here you okay welcome back first up here is digging trenches which is the moat rating um any competitive advantages here for light speed i no i couldn't find one i really couldn't yeah i mean you could argue that within an individual small business they may have a moat just because the switching costs and getting a whole new payments network setup is kind of a moat just from a switching cost perspective but they don't have anything and they have 77 000 customers yeah so

those customers may be sticky but compared to you know square clover anyone else i don't think they have any advantages over them yeah to their other competitors no in terms of new entrance like you're basically picking between commodity products right it's you're picking whatever point of sale system gets the job done for you um i like a guess that they specialize in restaurants and retail but maybe golf yeah yeah um but other than that no i don't really see a big mo yeah no definitely not so maybe one one yeah potentially and they're so much smaller that they're gonna have no scale advantages versus someone like even paypal shopify square clover yeah what about uh further reading further read um i mean what customers you know like about light

speed um it's tough to see any reviews um and i know online reviews can be manipulated but compared to other payment systems what do they like how are the costs different i know they actually charge a little bit less than square does um which may be a differentiator but that's going to lead to lower margins um in the long run at least um and then their brand may be the only time they can differentiate uh and that's always tough to do it's tough to build a brand over time as everyone knows on most brand you know building is kind of a waste of time and then i also want to know why our golf course is so important to them i think they made a strategic acquisition or partnership with that and i want to know if they're trying to invest heavily into there and

you know why they're doing it yeah are you almost more bullish if they just said yeah we're we just are software that runs golf courses may well the i'd almost rather than take a niche yeah and expand out from maybe not just golf courses but maybe golf courses and five other things yeah um okay so i'm now i'm basically looking at the same thing as you how is their product any different from the other pos providers um so product differentiation and then also if there is product differentiation is it repeatable by their competitors yeah like if is this someone was touting inventory management why couldn't square just do the exact same thing I think they do, and a lot of other companies do as well.

I'm sure Shopify has that. Yeah. So I don't know. I guess there has to be something. Something. There's a reason people use it. Maybe the – I don't know. There's got to be a reason people use it over –

choosing them at least over Square, Clover, Shopify at some points. All right. Future growth opportunities, what do you have? Lightspeed Capital. So if you thought Lightspeed sounded like some VC firm, Lightspeed Capital, that definitely does. That basically is, yeah. So they launched this in August in partnership with Stripe to all their U.S.-based retailers, and this basically allows Lightspeed to provide up to $50,000 in financing per retail location, and it expands.

They're able to lend more and finance more as they start to do it for a while, if I'm not mistaken. And then I believe they're drawing the data from Stripe. So Stripe supplies the data, which basically establishes creditworthiness of their small and medium-sized businesses. Are you sure about this? Yeah, I saw it in the investor presentation. It says we draw on the data from Stripe's business network. And then Lightspeed obviously provides the capital. They get interest paid back on that.

It's a lot like Square Capital, I imagine. Yeah, it seems like they copied that again. Yeah, not to be Square Homers, but they did. It's the same roadmap for every one of these businesses, right? You're taking a little bit of every transaction, hopefully building out enough in volume or enough reliance on your system that you can build out all the rest of the functionality behind it. Yeah. Does this worry you that all these businesses, because so much capital is pouring in, are going to be a little bit commoditized and maybe have pricing pressure, margin pressure over time? Yeah.

And I didn't even really like Square solely for retail. They have the double – yeah, okay. We were really – we were fans of Square. Yes, we were optimistic about the retail business because there was so much in the back end that helped power those businesses. But really it was the Cash App that drove that for us. And so just a pure POS play, I don't know. I'm not as optimistic. Right, right.

Okay, I'll get to mine. It is e-commerce offerings. They make them a full omni-channel platform, as a lot of businesses like to say. um they're just again you know they're copying all the other businesses that do that but it makes sense for them to do this especially in the march period i think they had a hundred percent growth in e-commerce uh for their small businesses you know the future growth is going to be following the same path as these companies like we just said i honestly think it would be great for them to get bought out by square um the square used their expensive stock at the moment um they have

you know a lot of currency to use it would probably dilute them i should actually look up what their market cap is relative to them real quick here it is yeah they have an enterprise value of 85 billion it wouldn't dilute square shareholders that much i think the combination uh would work even better because they basically run the same business um and it would be great for light speed shareholders they get bought out probably at a premium and you know it'd be great for square in the long run yeah uh highlights and lowlights okay highlights i mean it's a great industry overall the recurring revenues are nice you know you're just getting basically that the annuity stream off of the small business if you're providing them enough value um yes it might

be tough to scale with all the competition coming in but on a unit economics basis it's fantastic they have this partnership with google as well to help build out the you know quote my business pages on google maps and google search which are very important to make those right because i know a lot of the times i won't go somewhere if that page isn't correct yeah um and the hours aren't you know good so i think that's a good way maybe they can get creative and be differentiated with that um that's probably why they have that partnership is you know the old google google cfo um which i guess i just made that connection low lights though right yeah yeah piecing that together yeah yeah low lights you know large competitors we all know the competitors there's

even paypal out there there's the big banks um they have to work with visa and mastercard who have a lot more power as well um you know gross margin is going to decrease over time it's not going to stay in the 60 to 70 percent range it'll probably go down to the 45 to 50 percent range unless they offer some new high margin business offerings um feels to me like a big time buyout candidate yeah uh you know the large cap financials i said square earlier just because they run basically the same businesses but i could see paypal buying them out i could see stripe buying them out i could see shopify buying them out shopify might make even the most sense because they're trying to enter into that physical retailing more yeah that's the thing with

square buying them out is like people always tout synergies square prefers to buy companies i imagine that give them some product adjacencies but it's really something else that's an added feature whereas just buying the exact same business but smaller doesn't really feel like you're doing a whole lot yeah shopify might work better um now that i'm thinking about it and then my last low light is that operating expenses are right now almost double of what gross profit is and that is a tough hole to dig out of because you're still paying all those people you have to grow um to get out of there and it's just it's going to take a while yeah um highlights for me it's the same they're growing fast they're helping small businesses um the other part is it's like

yeah they have big competitors but it's not a winner-take-all space i don't think um there's no reason just because yeah as a new small business you're going to have to pick a pls provider and you're going to have to pick the back-end systems that come with that point of sales system or hardware but it doesn't mean it's all going to go towards one right and the low lights for me uh there's a floor in terms of how much they can charge right yeah and so if you're looking at it like big tech or bigger companies being able to price out light speed there's really a floor because even square can't go that low with their take rate because visa and mastercard have to take it there's a whole bunch of back-end payments parts that goes into that payment that

square is not getting all 2.6 percent yeah and it's a reason why some of these companies so shopify and online and then square and clover and physical are trying to go for the larger businesses you know like baseball stadiums things like that because that is where the scale advantages may work and you actually can you know be more profitable with those uh smaller take rates yeah um so all in all low lights it's just a tough spot to be in tough spot to be in for a growing uh you know yeah it's just tough all right to wrap things up are we more or less interested in light speed i'm pretty uninterested uh just feels like i hate copiers like yeah i know okay they were founded in 2005 so i'm not saying they were they've done they were obviously out before

square but that doesn't mean they haven't copied them along the way like square might be the innovator here and then lightspeed's just copying everything they do and literally the biggest red flag for me on this might be the investor presentations yeah because they i mean who knows i mean maybe square copied them but i don't think so they've been doing that for a long time that those pictures they're frame for frame like the same style everything they couldn't have been doing that because they didn't ipo until 2019 so they have to be copying square you are right i'm i'm pretty uninterested yeah i'm uninterested here's okay the only scenario i could see myself buying um owning shares as if they get to you know cash flow positive eventually and the sales

multiple comes down a ton at that point if you think that they have a stable enough business and their customers are going to stick with them, it could be fine. But at this price and at these operating margins, no way. If it was a lot cheaper and we saw the stability in the customers and the recurring revenue was, I mean, it's already 90% of the business, but I don't know. We need to see maybe a year or two of stability in terms of customers with that. Yeah, and getting closer to positive cash flow.

The other part, it's not like consumer spending is really at a all-time high. COVID's still around. And I believe their last quarter numbers were a little impacted in terms of gross transaction volume. A little bit, yeah. But they still put up some good top-line growth, which I think is a positive there. All right. Well, that's going to do it for this episode then. If you guys have any suggestions, DM us on Twitter.

And if you're not on Twitter, email us at chitchatmoneypodcast at gmail.com. Remember, we are not financial advisors and anything we say on this show is not formal advice or recommendation. Thank you for listening to this episode. We'll see you all next week. Thank you.