LSPD - Lightspeed Commerce: Unlocking Omni-Channel Commerce Opportunities With Unique Positioning

2023-09-12 03:53:56 ET

Summary

• Lightspeed Commerce is a top-tier cloud-based, omni-channel commerce vendor benefiting from the shift to SaaS-based solutions and software-integrated payment distribution in the POS industry.
• The company's growth is driven by legacy POS system transitions and the substantial increase in e-commerce adoption.
• Lightspeed's growth outlook is supported by its omni-channel approach, expanding payment reach, and favorable e-commerce growth in retail commerce.

Thesis

Lightspeed Commerce Inc. ( LSPD ) is a specialized POS software provider, benefiting from two significant ongoing trends in the POS industry: the shift from traditional systems to SaaS-based solutions and the integration of software into payment distribution. Positioned as a top-tier cloud-based, omni-channel commerce vendor, LSPD capitalizes on these trends, driven by legacy POS transitions and the surge in e-commerce adoption. I believe the company's strong organic growth outlook is supported by its omni-channel approach and expanding payment reach, indicating the potential for a higher valuation multiple.

Q1 2024 Review and Outlook

Lightspeed's first-quarter results stood out, with revenue surpassing expectations by 5%. The Gross Transaction Volume of $23.4 billion also exceeded expectations, indicating that the impact of macroeconomic conditions on consumer spending wasn't as negative as initially feared. However, despite the robust performance across various metrics, including GTV, revenue, and adjusted EBITDA, the company maintained its FY24 revenue outlook, citing caution due to two factors: the broader consumer spending climate affecting GTV and the gradual acceptance of the Unified Payment strategy. The strategy, which mandates Lightspeed Payments, displayed initial progress with around a 3% sequential increase in penetration. However, the management acknowledged that larger clients might adopt it more slowly, and certain verticals are excluded from this service. It's too early to determine the long-term impact of Unified Payments, considering the interplay between its adoption and potential customer churn.

Lightspeed reiterated its growth projection of 20-23% in revenue and achieving break-even or better EBITDA in 2024. The management anticipates stronger trends in the second half compared to the first. The pivotal factor for Lightspeed's future lies in the acceptance of its payment solutions. Although the in-quarter payment outcomes were promising, the unaltered FY24 revenue outlook reflects a cautious approach to this metric. While it's too soon to predict the ultimate success of Unified Payments, I believe the risk-reward balance favors Lightspeed due to its guidance and valuation. Even with a conservative growth projection in the guidance, with shares trading at approximately 1.8 times the estimated CY24E sale, I find the risk-reward scenario favorable for the company.

E-commerce growth in retail commerce & opportunity for omni-channel commerce platforms for SMBs remains favorable for LSPD

Lightspeed offers cloud-based commerce and payment solutions to small and medium-sized businesses ((SMBs)) for both in-store Point of Sale ((POS)) and digital platforms. With the rise of omnichannel commerce, businesses are increasingly combining traditional in-store sales with online and mobile channels, a trend accelerated by the advent of COVID-19.

Since introducing its cloud-based POS solution, Lightspeed Commerce has been consistently adding new features and modules to expand its product offerings and cross-sell to its customer base. In 2015, the company launched an eCommerce solution for the retail sector, followed by a similar offering for restaurants in 2020. Another significant milestone was the introduction of an in-house payments module in early 2019, initially for US retail customers and later for US hospitality and Canadian retail customers. To complement its organic product development, Lightspeed Commerce has also made strategic acquisitions, such as Chronogolf to enter the golf vertical and ReUp for its loyalty module.

Given the fragmented nature of the global commerce market and the challenges faced by niche vendors during the COVID-19 pandemic, I anticipate that the company will continue to pursue acquisitions to accelerate its product roadmap and expand into new industry verticals and geographic regions. This strategic journey has positioned Lightspeed Commerce uniquely in the market, allowing it to differentiate itself from legacy on-premise POS vendors and compete effectively with modern POS and e-commerce providers.

Over the past decade, retail spending has gradually shifted towards online channels or e-commerce, which positions LSPD well for growth. This change is attributed not only to the popularity of e-commerce giants like Amazon but also to brick-and-mortar stores adopting online storefronts and mobile options for shoppers. The e-commerce's share of total retail has grown from 7.4% in 2015 to 19% in 2021, equivalent to $5 trillion in 2021.

SMBs comprise the vast majority of businesses globally, with 333 million SMBs worldwide, according to Statista . These SMBs have a plethora of software needs, ranging from core commerce to CRM and communications. As per Analysys Mason, IT spending by SMBs is set to grow to $1.45 trillion in 2023, an increase of 6.3% YoY.

Within this large SMB software spending, cloud e-commerce software represents a fast-growing category with a CAGR of 21% through 2030. E-commerce software presents a blend of new possibilities and the evolution of existing systems towards advanced SaaS solutions. Those who embraced e-commerce initially are currently reliant on older systems or tailor-made applications hosted locally. These older solutions will ultimately give way to next-generation SaaS offerings.

Valuation

Lightspeed has a large TAM, and secular tailwinds from omni-channel commerce adoption and increasing payments penetration give confidence in the company's organic growth. I acknowledge the declining gross margin due to payments penetration (similar to what I see for comps like Shopify Inc. ( SHOP )); however, I believe investors should keep in mind that payments represent an easy cross-selling opportunity with very little incremental customer acquisition/upsell costs. This implies that despite the low gross margin for payments, I expect payments revenue to have an attractive overall contribution margin in the mid to long-term. Since LSPD is not a profitable company yet, I look at the company's EV/Sales metric which compares favorably compared to the sector median, as shown in the valuation grade below. Lightspeed trades at a meaningful discount to peers like Shopify Inc. and BigCommerce Holdings, Inc. ( BIGC ), which I believe is driven by investor perception around traditional POS vs. eCommerce vendors. However, I expect multiple expansion as the company's positioning around omni-channel commerce rather than just in-store POS becomes more apparent in the investment community. Hence, I remain positive on the stock and assign a buy rating to LSPD.

Risks

LSPD has effectively generated value through its M&A strategy, although it is not without its challenges, including potential integration risks associated with acquisitions, even though the company's execution has been efficient thus far. Acquisitions could be tougher ahead as peers also explore both organic and inorganic growth avenues. Moreover, while LSPD seems attractive as a target, considering its substantial size, acquiring it might require larger deals, which could be more challenging to find and could also introduce integration uncertainties. Moreover, although LSPD is on its way to achieving profitability by FY24, investors might give higher priority to profitable companies given the current tough macro environment, which poses a risk to LSPD shares.

Conclusion

LSPD is a specialized POS software provider benefiting from the ongoing transition towards SaaS-based solutions and software-integrated payment distribution in the POS sector. Targeting the expansive total addressable market for SMB-oriented omni-channel B2C commerce, further accentuated by pandemic-induced changes, LSPD boasts a comprehensive modern commerce platform, encompassing in-store POS and e-commerce, bolstered by a proven sales approach and extensive back-office capabilities to cater to diverse SMB needs. I believe the current valuation multiple provides a good entry opportunity to long-term investors, and therefore, I assign a buy rating to the stock.

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