Lightspeed Stock – Is The Company Still a Buy

WRITTEN BY Dylan Callaghan | UPDATED ON: November 7, 2023

Lightspeed Commerce

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The last few years haven't been the best for Canadian tech stocks. However, with tech companies recovering significantly in the United States and the NASDAQ off to one of the hottest starts to the year in its history, many are wondering if Canadian technology stocks, mainly Lightspeed stock, are worth looking at today.

Let's have a look.

What does Lightspeed Commerce (TSE:LSPD) do?

Going public in mid-2019, Lightspeed Commerce, which was formerly called Lightspeed Point-Of-Sale (POS), provides an omnichannel SaaS platform that enables retailers to accept payments, manage operations, engage with their customers, and even book tee times.

The company has over $23B in transaction volume flowing through its platform and serves over 500,000 locations. The company is also expanding into new verticals. Suppose you're a golfer here in Canada. In that case, you'll likely encounter a Lightspeed platform when booking a tee time online with its Lightspeed Golf system.

The bulk of the company's transaction volume will flow through small to medium-sized businesses focusing on the retail and hospitality sectors.

How fast is Lightspeed stock expected to grow?

Due to the current economic drawdown, Lightspeed's growth trajectory estimations have come down materially. However, the stock is still expected to put up large-scale growth. It should still be one of Canada's faster-growing technology companies.

During the pandemic, when interest rates were at rock-bottom levels and capital was cheap, the company made multiple acquisitions to scale the business and grow faster. Losses piled up, but investors were willing to be patient with the company.

Fast forward to 2023, and the focus is all on profitability. As such, the company has pulled back high-scale growth initiatives, particularly through acquisition, to instead focus on turning a profit. 

The company and analysts believe they'll hit that mark in Fiscal 2024, with earnings expected to come in around $0.15 per share and revenue in the $1.19B range. This would be more than 20% growth on the top line, and in terms of earnings, it would be a material shift from the nearly 27 cents per share they lost last year.

In 2025 and 2026, analysts expect the company to generate revenue of $1.57B and $2.28B, while earnings are predicted to come in at $0.504 and $1.37, respectively.

This is large-scale growth, large enough to catch Canadian investors' attention who want to own fast-growing technology companies.

What is the main thesis behind buying Lightspeed stock?

Analysts predicting large growth is nice, but as an investor, you still need to know why you're buying a business. Most investors who decide to pull the trigger on a purchase of Lightspeed stock are likely doing so, expecting the company to grow not only the transactional-based volume that flows through its payment systems but also the subscription revenue it generates via its tools to help businesses generate more sales.

The main segment that will generate this growth and one investors looking to buy the stock will need to pay particular attention to is small businesses. Why? 

Nearly 70% of Lightspeed's Gross Transaction Volume comes from businesses that generate less than $500,000 in GTV. Only around 15% of their GTV comes from businesses that process more than $1M in volume. So, it's safe to say that small businesses are the lifeblood of this company.

The company also has a large-scale retail focus. Around 65% of the company's footprint comprises retail companies, while the other 35% is in the hospitality sector. So, a lagging economy certainly isn't a good thing for Lightspeed, but it shouldn't be the end of the world for long-term investors. It could simply allow them to add more shares for cheaper.

What is the strength of the balance sheet?

Unlike most high-growing technology companies that often have weak balance sheets and are exposed to things like interest costs eroding earnings, Lightspeed has a boatload of cash and carries zero debt.

The company's current ratio, which represents its ability to pay all liabilities due in the next year with its current assets, sits at 6, which means Lightspeed could pay them six times over before being at risk. This is a strong ratio and should allow the company to remain flexible even in some pretty tight economic conditions.

Is Lightspeed stock too expensive right now?

No matter how promising a business is, we can't pay too much, or returns will be minimal. So, valuation is always an important concept when looking at a stock. In Lightspeed's case, it trades at a significant discount to its competitors and industry averages.

Competitors like Shopify (SHOP), Toast (TOST), and Nuvei (NVEI) are trading at EV/Sales ratios of 11.17, 3.27, and 4.32, respectively. Meanwhile, Lightspeed trades at just a 2.52x EV/Sales ratio.

In addition to this, with the industry average hovering around the 4.5x mark, it's slightly confusing why the market is discounting Lightspeed so much regarding its competitors and the industry.

It could be that the company has high exposure to areas particularly impacted by a recession, like small businesses and hospitality. However, in my opinion, it's still relatively cheap. Its path to profitability will shine a lot more light on valuations in the future, something I'll need to keep an eye on.

Overall, Lightspeed stock has some upside but is not without risk

One of the main things we want to look at to protect a company's revenue is its economic moat. Although Lightspeed has high growth prospects and operates in a market with a significant TAM, it doesn't have much of an economic moat, so investors are likely not willing to pay a super high valuation for this company.

With most of its clients being retail stores, hotels, and golf course operators, its payment solutions could be at risk if a cheaper alternative comes around. Small businesses are more likely to swap systems than major corporations if a similar, more affordable platform emerges, as the transition is much easier for the company.

Overall, I'd view the stock as a high-risk, high-reward company that is in a strong enough financial position to weather whatever economic downturn we head into if we do.