You may not have heard about Latch, but it’s well known among building managers, who use the service to secure apartment and commercial buildings.
Imagine the logistical headaches associated with the comings and goings of deliveries and personnel to high-rises, and then consider a way to digitally control operations: everything from unlocking doors via mobile device to adjusting temperature settings. All these and more fall under the remit of Latch.
In a nutshell, a building manager can control the ins and outs of day-to-day activities remotely and conveniently.
Where Latch Shines Brightest
An astonishing statistic in favor of Latch is that of ALL new apartment buildings in the United States under construction, the company has won 30% of contracts. Intuitively, it makes sense that the modern building will leverage the latest digitally-controlled, centralized software and hardware solution. Why wait for a water leak when Latch can alert you faster to the risk?
The key competitive advantage for Latch is once installed, it’s hard to dislodge. That’s the definition of a good moat in business. It’s not easy to win deals, unless you’re early to market like Latch. And fast followers will struggle to disrupt the business, meaning that a sustainable competitive advantage is hard to cede over time – even to well-capitalized competitors.
After all, a building manager doesn’t want to switch out Latch for another solution after going to all the trouble of installing it and learning how Latch works – unless the competitor has something highly compelling to entice them (and no such alternative currently exists on the market).
The Forecasts Look Rosy
Management forecasts that top line sales will come in as high as $100 million this year.
Is that impressive?
If successful, it will represent almost 150% growth over 2021 sales. Even the low-end forecast of $75 million would signal a near double from the $41 million posted last year.
The good news doesn’t stop there. Because Latch sells both hardware and software, it has a recurring component to sales, which should lead to tens of millions of dollars in sales going forward, predictably.
But if sales growth is huge and the forecasts are so bright, why has the stock been taken out to the woodshed and beaten so badly? The company lost billions in value to sit at a market capitalization of around $624 million at the time of research.
The answer in two words is: cash flow.
Cash Flow Concerns
While bookings were up by 119% in 2021 vs 2020, and revenues grew 118% over the same comparison period, delays in new building constructions are causing cash flow concerns. Negative free cash flow totaled $110 million.
Another fly in the ointment is the revenue projections. While lofty, they remain well below the forecasted $173 million released during SPAC guidance.
The Bull Vs Bear Case for Latch
Look no further than Apple to see how successful the model of building hardware first and selling software later can be. Latch has a similar hardware-sales first, software-sales subsequently model.
Hardware is notoriously low margin while software is famously high margin. If Latch can keep the engines running long enough to reach liftoff, the sky is the limit.
At today’s prices, Latch is undervalued based on financial models. A revenue multiples model produced a fair market value of $7.07 per share, which is almost 75% higher than the current price. A price-to-sales multiple comp places a $6.16 per share price target on Latch, closer to a 50% hike from current levels.
On the flipside, bears can point to free cash flow profitability in 2022 fading away versus former projections, which in turn will impact 2023 figures.
While Latch has $332 million in cash reserves on the balance sheet as of the end of 2021, sustained cash burn could eventually trigger liquidity concerns. At that point management would be left with few attractive alternatives: dilute existing shareholders or borrow at higher rates now that the Federal Reserve has signaled its intention to hike rates.
Is Latch A Buy?
Dividend-seeking conservative investors should likely shy away from Latch. The cash flow concerns pose too much risk for investors who put capital preservation above all other considerations. For the more risk-seeking investor, who is willing to ride the volatility wave that Latch could continue to generate, the potentially outsized rewards may well be worth the risks.