Lightspeed Hits Speedbump As International Growth Picture Sours (Downgrade)

Summary

• Lightspeed Commerce Inc. went public in 2020 in the U.S. at $30.50 per share.
• The global point-of-sale market is expected to grow at a CAGR of 8.3% from 2023 to 2030, with the software market growing at a higher rate of 15.1%.
• Lightspeed's financial trends show growth in revenue but continued negative operating income and slow progress towards breakeven.
• With poor international macroeconomic growth prospects, Lightspeed Commerce faces an uphill slog to reduce operating losses amid high cash use.
• My outlook on Lightspeed Commerce Inc. is Bearish [Sell].

Investment Outlook

Lightspeed Commerce Inc. (NYSE:LSPD) went public in the U.S. in 2020, selling its subordinate voting shares for $30.50.

I previously wrote about Lightspeed in August 2023 with a Neutral Hold outlook on continued high operating losses amid growing revenue.

My outlook is Bearish [Sell] due to a poor international macroeconomic environment, continued high operating losses, and free cash burn.

Lightspeed’s Market And Approach

Lightspeed operates in the point-of-sale hardware and software market in North America and Europe, selling a variety of software functionalities and transaction processing for businesses in the retail, restaurant, golf and ecommerce industries.

According to a market research report by Grand View Research, the global POS terminal market was an estimated $104 billion in 2023 and is expected to reach $181 billion by 2030.

If achieved, this would represent a CAGR (Compound Annual Growth Rate) of 8.3% from 2023 to 2030, a reasonably strong growth rate.

The chart below shows the U.S. POS terminal market’s historical and projected future growth trajectory through 2030, by product type:

The global POS software market was an estimated $21.1 billion in 2023 and is expected to grow to $74.7 billion by 2032, representing a much higher forecasted growth rate of 15.1% from 2024 to 2032. (Source: Market.us research report.)

The software POS market is producing higher growth due to demand for cloud-based systems, integrated transaction processing and a trend toward digitalizations across numerous industry sectors.

Significant traditional vendors include:

• NCR

• Oracle (Micros)

• Verifone

• Ingenico.

Newer cloud-based entrants:

• Shopify

• Block

• Toast

• Clover

• Lightspeed.

Newer aspects for these system providers include providing mobile capabilities, omnichannel integration, self-service functions including kiosks and AI-enabled activity such as recommendations, inventory management and predictive analytics.

Lightspeed’s customers value its omnichannel features, customer engagement, ease of use and scalability and its specialized capabilities for retail and restaurant use cases.

The company also has an extensive partner integration network that adds value to special requirements depending on the customer.

Recent Financial Trends And Valuation

Total revenue by quarter (columns) has resumed growth after a flatter period during late 2022 and early 2023; Operating income by quarter (line) has remained heavily negative, with no progress toward breakeven in recent quarters.

Gross profit margin by quarter (green line) has stabilized as a result of declining referral fees for transaction revenue; Selling and G&A expenses as a percentage of total revenue by quarter (orange line) have dropped due to reduced share-based compensation and reassignment toward selling its unified payments solutions.

Earnings per share (Diluted) have remained heavily negative, with slowing progress toward breakeven.

(All data in the above charts is GAAP.)

Compared to competitor Block (SQ), the market is valuing LSPD at a lower EV/Sales multiple despite growing faster but producing far higher net losses and using significant operating cash, per the table shown here:

(Source: Seeking Alpha Data.)

Also, the stocks of the two companies have largely tracked each other over the past year, although LSPD’s recent drop after a soft outlook has pushed its 12-month return to below that of Block’s, as the chart shows below:

The company's major metrics are shown in the table below:

(Source: Seeking Alpha Data.)

The firm’s Rule of 40 performance has improved only marginally over FQ1 2024’s results, as the table shows here:

(Source: Seeking Alpha Data.)

Why I’m Negative On Lightspeed

Lightspeed recently sold off after comments from management about a challenging adoption cycle for its bundled software and unified payments system in Europe.

The firm is seeking to grow its payments gross transaction value [GTV] and the number of locations with high GTV metrics.

It appears the European operation is experiencing slower-than-expected growth as it needs to educate the market on the benefits of its system, which can take a while.

As a result, founder and Executive Chairman Dax Dasilva has replaced CEO Chauvet, effective immediately.

This appears to be an emergency move designed to reinvigorate the company's growth efforts internationally.

The problem for LSPD is that macro conditions are worsening. The UK has just entered recession, Germany is well into recession, and France will be lucky to grow at 0.1% after recession quarters earlier in 2023.

Europe is once again the "sick man" economically, likely dragging down LSPD’s ambitions for growth there, customer education requirements aside.

The company's only hope is a strong-than-expected growth trajectory in the U.S. & Canada to make up for a sagging international picture.

But LSPD continues to use free cash to buy revenue growth, as the chart shows here:

Add to that continued high operating losses and intense competition from other industry upstarts and legacy players and the stock may be damaged goods for some time ahead.

With challenged growth prospects, high free cash burn and a dour international macroeconomic environment, my outlook on Lightspeed Commerce Inc. is to put money elsewhere.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.