Lightspeed Logo
Lightspeed Commerce (LSPD) Stock | NYSE: LSPD | TSX: LSPD

Covered by Stratosphere

Redefining SMB Commerce

Based in Montreal, Canada, Lightspeed Commerce Inc. ("Lightspeed") is a point-of-sale ("POS") and e-commerce software provider to retail and hospitality businesses and golf course operators worldwide. It is a fast grower in the space and is redefining the way these businesses in these industries run their operations.

Lightspeed's aim is to be the one-stop shop for everything commerce that retail and hospitality businesses can use to improve their bottom line. The company hosts a variety of modules in its ecosystem that helps bring this goal to life, ranging from unifying digital and physical operations, global payments, financial solutions, and supplier networks.

Stratosphere Score

7

Growth

10

Valuation

7

Quality

7

Margins

4

Dividend

0

Balance Sheet

10
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Lightspeed has carved out a niche in the retail and hospitality industries by disrupting traditional POS systems with its omni-channel and integrated approach.

  2. The company uses a highly effective go-to-market strategy that plays on its strengths in growing its ecosystem and constantly improving its products' value propositions.

  3. The global POS software market is highly fragmented - Lightspeed has been acquiring companies at a rapid pace and integrating them effectively despite high valuations and some with inferior economics to those of Lightspeed.

  4. The global POS software market is growing quickly. Lightspeed is positioned in a manner that should allow it to penetrate a higher proportion of its total addressable market ("TAM").

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Simplifying Business

Lightspeed's solutions are fully integrated and reduce the need for SMBs to put together multiple disjointed or incompatible applications from various providers. Each of its platforms are designed and tailored to meet the needs of every SMB, making technology available to smaller businesses that were traditionally only used by large companies.

Lightspeed's main competitive advantage is equipping SMBs with platforms that give them a competitive edge. In Lightspeed's 2019 Year in Review report, the company revealed that Canadian and US retailers using Lightspeed saw 10.3% and 13.8% year-over-year ("YoY") growth in GTV in 2019 versus 2018. Over this same one-year period, the industry average in Canada was 1.5% YoY.

Each SMB can use the combination of payments and operations, loyalty, and analytics solutions to run their business, analyze their performance, and find ways to increase customer loyalty. We consider the intertwining of these solutions at a reasonable price to be Lightspeed's triple threat.

Not only are Lightspeed products sticky, customers also cannot get enough of them. We believe this is reflected in Lightspeed's revenue per customer location. Customers see lots of value in Lightspeed's platforms and are continually increasing the number of platforms they employ at each of their locations.

Carving Out a Niche

Lightspeed competes with two major behemoths - Square and Shopify. Despite their massive presence in the POS market, Square and Shopify focus on different markets than Lightspeed, who is carving out its own niche.

Lightspeed focuses on SMBs that have an existing brick-and-mortar foundation as opposed to an online-first presence. The typical SMB that uses Lightspeed products approaches their business using an omni-channel method. While physical stores drive most sales, these businesses recognize that an online presence is of growing importance for their survival in today’s digitizing world.

On the other hand, Square's products can be used by any type of business, meaning its solutions are more broad and target a broader market as well. Shopify focuses on small "e-tailers" and recently entered the live retail space.

Lightspeed's edge over Square and Shopify is derived from the specificity of its products and high level of systems integration for physical retail, restaurant, and golf course businesses. While the other two behemoths provide platforms broader in nature, Lightspeed's target market finds value and ease in using Lightspeed platforms. 

As a first mover in this niche, Lightspeed's current and prospective customers quickly find that Lightspeed is likely the best provider of omni-channel commerce solutions for a physical-first business.

Although it is too early in Lightspeed's growth story to conclude whether it has strong pricing power, we believe we have early evidence that the company’s net dollar retention rates of above 100%, rising revenue per customer location, and a vastly growing customer base point to a sticky product portfolio that customers need more of as their businesses grow.

Land(ing) and Expand(ing)

Lightspeed's go-to-market process is highly flexible and one that accommodates the needs of each individual SMB. While other companies seek bulky contracts right off the bat, Lightspeed allows for simplified pricing, payment terms in local currencies, and contract flexibility.

Lightspeed's Go-To-Market StrategySource: Lightspeed Prospectus

Every SMB that engages with Lightspeed can choose from flexible sets of modules for their specific business needs. Once Lightspeed "lands" a customer, even if it's at one location, it opens the opportunity for Lightspeed to find its way into other locations and upsell other modules.

Many customers that initially "land" with Lightspeed soon realize the benefits of reducing the number of services they use to run their business - they can reduce costs, reduce the number of contract renegotiations, and seamlessly integrate their systems for efficiency gains and optimal insight into their business.

Lightspeed's products are highly functional and allow for incredible integration. As the Lightspeed ecosystem grows through management’s large investments in sales and marketing, research and development, and other capital purchases, Lightspeed customers should find themselves hungry for more, adding on even more services that serve their business well.

Like clockwork, every new product and solution brought to market will attract new customers, introduce new cross-selling and upselling opportunities for existing customers, and increase revenue per customer and each location with Lightspeed's market strategy.

Opportunities Ahead

  • The POS industry is one that is highly fragmented and ripe for disruption. Lightspeed is saying "no more" to clunky, old POS systems from the past by helping physical and omni-channel businesses upgrade their software to a suite of integrated, compatible, and streamlined modules. Today, businesses are increasingly opting for SaaS-based solutions to replace these POS and payments systems. Fortunately for Lightspeed, the POS software market is one poised to grow substantially over the next few years - from $12.2 billion in 2018 to over $40 billion in 2027, a CAGR of 15%.

  • Lightspeed has a strong track record of innovation and providing its customers with effective solutions that work. Since its beginnings in 2005, Lightspeed has been consistently bringing new products to market that customers love. Lightspeed's growth strategy comes down to one overarching idea 0 create (or buy) highly complementary modules to monetize a greater portion of GTV.  One of the company’s main goals is to expand payments monetization as a percentage of GTV processed through Lightspeed's software systems. Today, payments penetration is about 10% up from only 1% in 2019, but management has a 50% penetration goal in its crosshairs as businesses replace legacy systems with Lightspeed's modern platforms. Lightspeed Payments presents one of the largest opportunities for Lightspeed.

  • To accelerate market and GTC penetration, Lightspeed is aggressively acquiring and partnering with other established players in the field. Within the last two years, Lightspeed made a few important acquisitions, namely including: Upserve, ShopKeep, VendLimited, NuORDER, and Ecwid.

    Upserve and ShopKeep were added to the Lightspeed ecosystem despite inferior economics to that of the existing Lightspeed Payments business before integration. Management quickly pivoted these businesses to align with the economics of Lightspeed Payments as a whole, showcasing the deep knowledge and expertise management possesses in the space. We expect more bolt-on acquisitions of these sorts that highly complement Lightspeed's business to expand global reach and capture a wider customer base. The market is highly fragmented and ripe of disruption with many potential acquisition targets.

  • Lightspeed is growing quickly and has a global presence that it can leverage to expand its industry expertise, introduce new products that customers need, and tap into new verticals. Lightspeed may have a target market of about 50 million SMBs today, but if it ventures into new industries with the knowledge it continues to acquire from its customers and their growing needs, that TAM can quickly accelerate towards the 230 million SMBs that exist worldwide across all industries. Management has identified the expansion into vertical markets via acquisitions and organic development as one of its main priorities.

Risks

Acquisition & Integration

Although Lightspeed has a great track record of turning around acquired companies to at least match the economics of Lightspeed, future acquisitions may not be accretive (i.e., beneficial to Lightspeed's growth profile and margins) at today’s high technology company valuations and face integration risks due to the unique nature and operations of each acquired company.

Competition

Despite the niche Lightspeed has carved out and the solid growth within it, Lightspeed competes against some major POS software companies. The main players are Square and Shopify, which can use their size and prowess to dismount Lightspeed in its growth trajectory if they consider Lightspeed a real threat. Square and Shopify are also more widely known by Lightspeed and offer a lot of cheaper services that could threaten Lightspeed.

High-Risk Customer Base

Lightspeed's customer base is almost entirely retail and hospitality businesses in the small- to mid-sized range. During economic hardship, these low-margin and smaller-sized businesses generally get hit the hardest and may pose a large risk to Lightspeed versus competitors like Shopify and Square, which have broader operations and target markets.

Valuation

Lightspeed's enterprise value (i.e., market capitalization + debt – cash) to sales (“EV / Sales”) ratio based on full-year 2022 revenue estimates is above 30x. Lightspeed's valuation is optically expensive, however, it may be justified given its growth. The main risk lies within Lightspeed's future execution over the next 5 to 10 years, which are uncertain to any investor. We believe investors should be cautious with a valuation this high in any company.

Join our stock investing newsletter

Investing articles and ideas in your inbox

We won't send you spam. Unsubscribe at any time.