On today’s TSX Breakouts report, there are 47 stocks on the positive breakouts list (stocks with positive price momentum), and 16 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a reader’s request.
The security highlighted below is Lightspeed POS Inc. (LSPD-T), a stock that was featured in the breakouts report in April. Months later, the share price more than doubled in value, rising to a record closing high on August 9. However, since then the share price has plunged 32 per cent. Last week, the company surfaced on the negative breakouts list with the stock in correction territory.
In recent weeks, cloud-based technology stocks have come under pressure with investors taking profits off the table. We have seen sector rotation into value stocks. Month-to-date, the top performing sectors are energy and financials.
A brief stock outline is provided below that may serve as a springboard for further fundamental research when investors conduct their own due diligence.
The company
Headquartered in Montreal, the company’s software allows its customers (small to mid-sized retailers and restaurant operators) to accept payments and oversee their operations (e.g. inventory, customers, and product management) through Lightspeed’s cloud-based POS (point of sale) platform.
Given the company’s subscription-based business model, 89 per cent of the company’s revenue was recurring in nature in fiscal 2019 (the company’s fiscal year-end is March 31). The company has a diversified customer base with no individual customer accounting for more than 1 per cent of revenue in fiscal 2019. In terms of geographical breakdown, the majority (approximately two-thirds) of the company’s revenue originated from North America in fiscal 2019 with the balance from international regions. Lightspeed has operations in approximately 100 countries.
Operationally, the company continues to deliver solid growth. After the market closed on August 7, the company reported slightly better-than-expected first-quarter fiscal 2020 financial results and management raised its revenue outlook. Revenue came in at US$24.1-million, up 38 per cent year-over-year, fractionally ahead of the consensus estimate of US$23.5-million. Recurring software and payments revenue was US$21.3-million, up 40 per cent year-over-year. Gross margin was 65 per cent. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was a loss of US$5.1-million. GTV (gross transaction volume) was US$4.6-billion, rising over 30 per cent year-over-year, up from US$3.5-billion reported during the same period last year. The company reported an earnings per share loss of 11 US cents.
Management’s growth strategy includes both organic (internal) and acquisition growth (domestic and international growth). The company continues to expand its customer base as well as its services offered, driving higher average revenue per user (ARPU). During the second quarter, the company completed two acquisitions, Chronogolf Inc. and iKentoo. Customer locations grew to over 51,000 from over 42,000 last year. During the quarter, more than 2,000 net new customer locations were added. Rising customer locations translates into higher subscription revenue for the company. On the earnings call, the founder and chief executive officer Dax Dasilva said he is targeting customer locations to increase by more than 20 per cent per year.
Management raised its revenue outlook. The chief financial officer Brandon Nussey stated, “For the second quarter ending in September, we expect between $26.5 million and $27.0 million in total revenue, representing growth of between 42 per cent and 45 per cent [previously between 38 per cent and 42 per cent], and for the full fiscal year ending March 2020, we now anticipate between $112 million and $115 million in total revenue [previously between $107 million and $110 million]. This represents annual growth between 45 per cent and 48 per cent compared to our fiscal 2019 revenue. Turning to adjusted EBITDA and cash flow, our recent acquisition does bring an amount of incremental loss in the current year, which we expect will be eliminated on a run rate basis by the end of the year. Factoring this in for the full year, we expect operating cash flow to be a total use of approximately $9.5 million to $11 million and an adjusted EBITDA loss in the range of $18 million to $20 million. For our fiscal Q2, we expect operating cash flow to be a total use of approximately $5 million and an adjusted EBITDA loss in the range of $5.5 million to $6 million.”
Dividend policy
Management is focused on growth, and as a result, the company currently does not pay its shareholders a dividend.
Analysts’ recommendations
This stock with a market capitalization of $2.8-billion is covered by eight analysts, of which four analysts have buy recommendations, three analysts have neutral recommendations and one analyst currently does not have a published recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, CIBC World Markets, J.P. Morgan, KeyBanc Capital Markets, National Bank Financial, Raymond James, Scotiabank and TD Securities.
Revised recommendations
Earlier this month, Tien-Tsin Huang, the analyst at J.P.Morgan, increased his target price by $4 to $41 (the low on the Street).
In August, six analysts revised their expectations – all higher. Josh Beck, an analyst at KeyBanc, lifted his target price to $55 from $45. BMO’s analyst Thanos Moschopoulos raised his target price to $52 from $45. TD’s Daniel Chan boosted his target price to $52 from $29. National Bank’s Richard Tse bumped his target price up to $52 from $40. Scotiabank’s Paul Steep increased his target price to $44 from $31. Steven Li, an analyst at Raymond James, hiked his target price to $41 from $33.
Financial forecasts
The company is forecast to deliver strong top line growth. The consensus revenue estimates are US$114.1-million in fiscal 2020, up from US$77.5-million reported in fiscal 2019, US$169.4-million in fiscal 2021 and US$244.5-million in fiscal 2022. The company is several years away from reporting positive earnings per share.
Revenue estimates have been inching higher in recent months. For instance, three months ago, the Street was forecasting revenue of US$108-million in fiscal 2020, US$159-million in fiscal 2021 and US$235-million in fiscal 2022.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 16.7 times the fiscal 2021 consensus estimate. The shares are trading at an EV/Sales multiple of 11.3 times the fiscal 2022 consensus estimate.
The average one-year target price is $49.33, suggesting the stock price has 49 per cent upside potential over the next 12 months.
Individual target prices provided by seven firms are as follows in numerical order: two at $41 (the low on the Street is from Tien-Tsin Huang, the analyst at J.P.Morgan and Steven Li, the analyst at Raymond James), $44, three at $52, and $55 (the high on the Street is from Josh Beck, the analyst at KeyBanc).
Insider transaction activity
On Aug. 22, the company completed a secondary offering with the sale of over 6-million shares at a price per share of $35. Amongst the sellers were the Caisse de dépôt et placement du Québec, who sold over 2-million shares, trimming their position to 26,943,769 shares. The Caisse remains the company’s largest shareholder with an ownership position below 40 per cent. Additionally, DHI Dasilva Holdings Inc., which is controlled by the company’s founder and chief executive officer Dax Dasilva sold over 1-million shares.
Chart watch
On March 8, shares of Lightspeed began trading on the Toronto Stock Exchange. Due to the stock’s brief trading history, technical analysis is limited.
On Aug. 9, the share price closed at a record high of $48.61, an astounding 204 per cent gain above its IPO (initial public offering) price of $16. In August, the short interest ratio also peaked, reflecting investors’ expectations that the share price was due for a pullback. The stock soon entered correction territory, and is currently down 32 per cent from its record closing high. Last week, the stock entered oversold territory with the RSI (relative strength index) touching 30. Generally, an RSI reading at or below 30 reflects an oversold condition.
On a recovery, the share price may rally back to the $40, close to its 50-day moving average (at $39.38) before the stock reaches major resistance. After that, there is overhead resistance around $45. Should the share price continue to retreat, there is technical support around $30 and failing that around $25.
This stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 525,000 shares.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty