Lightspeed Business Corporation (NYSE:LSPD) is a professional POS software provider that benefits from two important 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 the top cloud omni-channel As an e-commerce provider, LSPD is taking advantage of these trends, driven by the transformation of traditional POS and the surge in e-commerce adoption. I believe the company’s strong organic growth prospects, supported by its omni-channel approach and expanding payments footprint, point to the potential for a higher valuation multiple.
Review and Outlook for the First Quarter of 2024
Lightspeed’s first-quarter performance was outstanding, with revenue exceeding expectations by 5%. Total transaction volume of $23.4 billion also exceeded expectations, suggesting that the impact of macroeconomic conditions on consumer spending was not as negative as initially feared.However, the company maintained fiscal 2024 revenue despite strong performance across various metrics including GTV, revenue and Adjusted EBITDA Looking ahead, the rationale is for caution due to two factors: the broader consumer spending environment affecting GTV and the gradual acceptance of unified payments strategies. This strategy requires the use of lightspeed payment, and the penetration rate has increased by about 3% month-on-month, making initial progress. However, management acknowledged that larger customers may be slower to adopt it and that certain verticals are excluded from the service. It’s too early to determine the long-term impact of Unified Payments, given the interplay between Unified Payments adoption and potential customer attrition.
Lightspeed reiterated its forecast for revenue growth of 20-23% and achieving breakeven or better EBITDA in 2024. Management expects trends to be stronger in the second half than in the first half. A key factor in Lightspeed’s future is the acceptance of its payment solution. Despite promising quarterly pay results, the unchanged fiscal 2024 revenue outlook reflects a cautious approach to the metric. While it’s too early to predict the ultimate success of Unified Payments, I believe the risk-reward balance favors Lightspeed due to its guidance and valuation. Even with the conservative growth forecast in guidance and the stock trading at about 1.8 times projected 2024 sales, I find the risk-reward scenario to be favorable for the company.
The growth of e-commerce in retail and the opportunity for omnichannel commerce platforms Small and medium enterprises Still optimistic about LSPD
Lightspeed provides cloud-based commerce and payments solutions for small and medium-sized businesses (SMBs) for in-store point-of-sale (POS) and digital platforms. With the rise of omnichannel commerce, companies are increasingly combining traditional in-store sales with online and mobile channels, a trend accelerated by COVID-19.
Since launching its cloud-based POS solution, Lightspeed Commerce has been continuously adding new features and modules to expand its offering and cross-sell to its customer base. In 2015, the company launched an e-commerce solution for the retail industry, followed by a similar solution for restaurants in 2020. Another important milestone was the launch of the in-house payments module in early 2019, initially for US retail customers and later for the US hospitality industry 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 commercial market and the challenges niche vendors are facing during the COVID-19 pandemic, I expect the company will continue to pursue acquisitions to accelerate its product roadmap and expand into new industry verticals and geographies. This strategic journey has placed Lightspeed Commerce in a unique position in the market, allowing it to differentiate itself from traditional on-premise POS vendors and compete effectively with modern POS and e-commerce providers.
Over the past decade, retail spending has gradually shifted toward online channels or e-commerce, which has laid a good foundation for LSPD’s growth. This change can be 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. E-commerce’s share of total retail sales has grown from 7.4% in 2015 to 19% in 2021, equivalent to US$5 trillion in 2021.
According to Statista, the vast majority of companies in the world are small and medium-sized enterprises, and there are 333 million small and medium-sized enterprises in the world. These SMEs have extensive software needs, ranging from core commerce to CRM and communications. According to Analysys Mason’s forecast, IT spending by small and medium-sized enterprises will grow to US$1.45 trillion by 2023, a year-on-year increase of 6.3%.
Within this massive SMB software spending, cloud e-commerce software represents a rapidly growing category, with a compound annual growth rate of 21% through 2030. E-commerce software incorporates new possibilities and the evolution of existing systems into advanced SaaS solutions. Those who initially embraced e-commerce currently rely on legacy systems or locally hosted custom applications. These legacy solutions will eventually give way to next-generation SaaS products.
Lightspeed has a massive TAM, and long-term tailwinds from omnichannel commerce adoption and increasing payment penetration give people confidence in the company’s organic growth. I acknowledge the decline in gross margin due to payments penetration (similar to my view on companies like Shopify Inc. (SHOP)); however, I think investors should remember that payments represent a simple cross-sell opportunity with little incremental amount of customer acquisition/upsell costs. This means that despite lower payment gross margin, I expect payment revenue to have an attractive overall contribution margin in the medium to long term. Since LSPD is not yet a profitable company, I looked at the company’s EV/sales metric, which compares favorably to the industry median, as shown in the valuation grade below. Lightspeed trades at a significant discount to peers like Shopify Inc. and BigCommerce Holdings, Inc. (BIGC), which I believe is driven by investor sentiment toward traditional POS versus e-commerce providers. However, as the company’s positioning around omnichannel commerce rather than just in-store POS becomes more evident in the investment community, I expect multiple expansions to occur. Therefore, I remain optimistic about the stock and give LSPD a Buy rating.
LSPD has effectively created value through its M&A strategy, although the strategy is not without challenges, including potential integration risks associated with acquisitions, despite the company’s execution efficiency to date. Future acquisitions may be more difficult as peers are also exploring organic and inorganic growth avenues. Additionally, while LSPD may seem attractive as a target, given its size, acquiring it would likely require a larger deal, which may be harder to find and may also bring integration uncertainty. Additionally, while LSPD is expected to be profitable in fiscal 2024, given the current tough macro environment, investors may prioritize profitable companies more, which poses a risk to LSPD stock.
LSPD is a specialist POS software provider benefiting from the ongoing transformation in the POS sector towards SaaS-based solutions and software-integrated payment distribution. Targeting the broad overall target market of SME-oriented omni-channel B2C commerce, further intensified by the changes caused by the epidemic, LSPD has a comprehensive modern commerce platform, including in-store POS and e-commerce, and is anchored by proven sales methods and a wide range of services. Backend functionality meets different small and medium-sized business needs. I think the current valuation multiple provides a good entry opportunity for long-term investors, and as such, I have a Buy rating on the stock.