What’s the “Shopify 2.0” teased by Motley Fool Canada?

by Travis Johnson, Stock Gumshoe | August 13, 2019 12:01 am

Another teaser solution from the Northern Fools

Time for another trip up north, to view the latest teaser pitch from the Motley Fool[1] Canada[2] for a recent IPO[3] that they think might be the next opportunity to get Shopify-like returns.

And they at least come by the Shopify (SHOP)[4] reference honestly — Iain Butler[5] and the folks at Motley Fool Stock Advisor[6] Canada did recommend Shopify at some point in the first half of 2016, less than a year after it became a public company, and we looked at their teaser ad that was pointing at Shopify back in June of that year[7]… and I think they recommended it before the US Fool newsletters, who jumped on board later that year (as did I).

The promise in the ad is that “This new Canadian IPO looks like Shopify 2.0” — so that’s tempting, of course, because SHOP has risen almost 1,500% in about four years. What else do we learn about it?

Well, sadly, there aren’t a lot of clues in the pitch… but Canada’s markets are, thankfully, still fairly small, so let’s see if we can get you an answer.

Here’s what we get…

“First, the stock has already shot up like a rocket ship, more than doubling in a matter of months.

“Second, the company has grown its revenue by a whopping 36% in the past year alone.

“Even more exciting, management expects continued double-digit revenue growth going forward.

“That’s the type of growth and market opportunity that gets Iain Butler’s heart
pumping….

“And while we could never guarantee Iain’s new alert will produce Shopify-like returns, this stock is already up 101% since its IPO.”

So with those limited clues, the Thinkolator concludes with about 90% certainty that we’re being teased about… Lightspeed POS (LSPD.TO, no US OTC listing yet), which is primarily a provider of cloud-based point of sale (POS) systems for retailers and restaurants.

Lightspeed is, like Shopify, trying to make life faster and easier for merchants — though they focus more on “bricks and mortar” retail than SHOP does, and, like SHOP, they also depend for a lot of their revenue on their customers using their payment processing networks (for credit cards, etc.) in addition to their equipment and other services. They even offer ecommerce stores as an add-on, and, frankly, would have probably been a good acquisition for Shopify if SHOP wanted to further solidify its in-person retail business (could still be, though at C$4 billion it’s getting to be a bigger pill to swallow).

It’s a heavily competitive business, including lots of legacy providers as well as scores of newcomers, including big and strong ones like Square (SQ)[8] and Shopify, but Lightspeed has grown nicely so far and seems to be making their customers happy. I hadn’t looked at them before this week, but I can see why they make the Shopify comparisons — not only is the business similar, but there’s also strong founder leadership and a focus on happy customers and building an edge through ease-of-use in an extremely competitive sector.

The product has been around for several years, with the first POS launched in 2013 and the restaurant offering (competing with OpenTable and many others) in 2014, but the biggest move, revenue-wise, was this year’s launch of Lightspeed Payments. It also represents some risk, since that’s the first time they’re competing with existing payment networks and processors… and therefore they might not get so many new customer referrals for their POS services and equipment from those legacy network operators.

But they surely are growing fast, and that tends to get investors’ attention. The clues were accurate as of last week, though last week Lightspeed also reported its first quarter and updated its outlook for the year, which drove the shares higher (up almost 20%). And the 2019 fiscal year did indeed bring 36% revenue growth, though that growth has actually accelerated in the first quarter. Gross Transaction Volume, the sales going through their systems (their customers’ revenue), is also growing quickly, up 30% over last year, and the customer base is up 20% in that same time period.

The addition of Lightspeed Payments is expected to bring much faster growth this year, so they’re now guiding for revenue growth of 45-48% for 2020 (and that they will lose only about $20 million on an “adjusted EBITDA” basis), though, as Shopify saw when they started their payment processing service, that will also bring down the company’s overall margins (payment processing is a lower-margin business than POS systems or other add-on software offerings). They seem, like Shopify a few years ago, in position that they could become profitable pretty quickly if they wished… but they’re putting their cash flow back into growth and seem to have a lot of ambition on that front, so they probably won’t actually report a profit for the foreseeable future.

So that’s all good and impressive, but, of course, you pay through the nose for good and impressive. They’re guiding for revenue of about $115 million for 2020, and the company currently has a market cap of about US$3 billion, so that’s 26X current-year sales.

If they can keep the growth up and the markets don’t stage a panic, that might work out just fine… that’s a valuation that would have sounded ridiculous to anyone five years ago, but is now pretty mundane for high-growth cloud software stocks. So you can justify it in a world where lots of market darlings trade at 25-40X sales, and you can probably argue that it is more appealing than Shopify’s current (similar) valuation because Lightspeed is much smaller and therefore has more “room to grow”, but do keep in mind that buying any stock at these kinds of valuations means you have to justify a price that most rational people would not be able to justify except in comparison to other similarly fast-growing cloud software companies. Which means that if they all go down, they all go down together.

I don’t know the company well after my few minutes looking at their financials, but it looks pretty impressive… I like the founders’ statements and the strategy they’re pursuing with bolt-on acquisitions to expand and improve their offerings, and the growth really stands out… just keep the risks in mind when you buy stocks that are this expensive.

Personally, I prefer to buy slowly and stick with small and manageable positions when dealing with scary valuations, since position sizing is the very most important part of risk management, but I am cognizant of the power of great growth stocks and I prefer to “let them ride” if they do well, and use a very wide trailing stop as long as I like what the company is doing. That means I won’t be retiring quickly if I pick the right boomer and bet big on it, but it also means I don’t have to pick the right boomer each time. I first bought SHOP shares with a very small nibble a few years ago, and have never been “comfortable” with the valuation, but the rapid growth means that it has become one of my larger holdings. Maybe that’ll happen with Lightspeed too, I don’t know and I’m a little worried that their growth will probably be more expensive than Shopify’s, just because they’ll require a lot of in-person sales efforts… but I haven’t studied this one closely enough to consider buying shares yet, particularly after the big jump it made next week.

I would guess that their next big move will come when OTC trading or a US listing makes it feasible for more US individual investors to get on board, there will probably be plenty of enthusiasm for the “next Shopify” and it wouldn’t be surprising to see more teaser pitches, but I don’t know when that will happen. The Motley Fool also has a good free article[9] up about the stock, from last month (pre-earnings and pre-recommendation, though they do disclose that the Motley Fool owns shares of Lightspeed), so that might help get you up to speed if you’re interested.

And that’s about all I’ve got for you, dear friends — have any thoughts on Lightspeed POS? Other stocks that you think would be a better match, or a better investment? Let us know with a comment below.

Disclosure: Among the stocks mentioned above I own shares of Shopify. I will not trade in any stocks covered for at least three days, per Stock Gumshoe’s trading rules.

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