2023-05-30 23:38:16 ET
Summary
- Lightspeed Commerce continues to trade near its 52-week lows.
- The company's latest earnings were actually very solid as it continues to show great top line growth with improving profitability.
- The current valuation is very attractive with multiples being the lowest compared to its peer group.
- I rate the company as a buy.
Investment Thesis
Lightspeed Commerce ( LSPD ) is down over 40% since my coverage in June last year. Unlike many growth companies that rebounded significantly, the company continues to hover around its 52-week low. In my previous article, I said that the company’s profitability is a notable issue and its valuation is also not compelling enough. However, this has changed in the past year.
The latest earnings finally demonstrated some improvement in the bottom line and its valuation has come down meaningfully amid the huge decline in share price. Considering the improved backdrop, I believe the recent drop in LSPD stock should be a solid buying opportunity for long-term investors.
Solid Q4 Earnings
Lightspeed Commerce recently announced its fourth-quarter earnings and the results are excellent, as the top line continues to see strong growth while the net loss also contracted. The company reported revenue of $184.2 million, up 26% YoY (year over year) compared to $146.6 million. Gross transaction volume 10% from $18.4 billion to $20.2 billion.
Transaction-based revenue grew from $66.7 million to $99.6 million, accounting for 54.1% of total revenue. The growth was driven by the higher adoption of its payment solutions, as GPV (gross payment volume) increased 70% from $2.2 billion to $3.8 billion. This adoption of additional solutions also boosted the ARPU (average revenue per user) by 24% from $270 to $335.
Subscription revenue grew 8.1% from $70.5 million to $76.2 million, accounting for 41.4% of total revenue. The growth was driven by new customer wins and renewals with existing customers. Gross profit increased 25% from $69.7 million to $87 million, as costs of sales remain steady.
The bottom line finally saw some improvements as spending slowed. S&M (sales and marketing) expenses as a percentage of revenue declined from 46% to 30.9%, as the company is seeing more organic traction in the payment segment. R&D expenses as a percentage of revenue dropped from 25.1% to 16.7% while G&A (general and administrative) expenses as a percentage of revenue dropped from 19.2% to 12%.
The lowered spending resulted in the adjusted EBITDA improving 78% YoY from $(19.7) million to $(4.3) million. The adjusted EBITDA margin was (2.4)% compared to (13.5)%. The net loss contracted by 34.9% YoY from $(114.5) million to $(74.5) million, or (40.4)% of revenue. The net loss incurred $50.1 million in expenses from restructuring and amortization. The diluted EPS was $(0.49) compared to $(0.77).
The company also initiated guidance for FY24 and the numbers look solid. Revenue is expected to be between $875 million to $900 million, representing a growth of 21.5% at the midpoint. While the adjusted EBITDA is expected to at least break even, which is a further improvement from the prior year.
Compelling Valuation
After the massive drop in share price, Lightspeed Commerce's valuation is looking very compelling. The company is now currently at an EV/sales ratio of just 1.56x, which is extremely cheap considering its growth and prospect. As you can see in the first chart below, its valuation is the lowest among peers such as Block ( SQ ), Par Technology ( PAR ), and Shopify ( SHOP ). The group has an average EV/sales ratio of 5.16x, which represent a significant premium of 230%.
The massive valuation seems unjustified when you look at their growth. As you can see in the second chart, the company is estimated to grow revenue by 21.9% this year, which is higher than all competitors besides Toast ( TOST ). Its gross margin is also the second highest at 45%, only slightly behind Shopify's 48%. Profitability is probably the main issue that is weighing on valuation, but the latest guidance points to the adjusted EBITDA breaking even in the coming year, which is very encouraging. As profitability continues to improve, I believe the valuation gap should also contract, which should present meaningful upside potential.
Investors' Takeaway
I believe Lightspeed Commerce now presents much greater value compared to a year ago. While the share price has declined substantially, its fundamentals have actually improved. As shown in the latest earnings, top-line growth remains very solid while the bottom line is finally starting to improve. The increasing penetration of its payment solutions should continue to be a solid growth driver moving forward.
After the plummet, the company's valuation has also become very compelling, with multiples being the lowest among its peer group. With both its fundamentals and growth holding up well, its valuation should eventually revert back to levels closer to peers. Considering the improving profitability and cheaper valuation, I am upgrading the company from a hold to a buy.
For further details see:
Lightspeed Commerce Q4 Earnings: Great Growth With Improving Profitability (Rating Upgrade)