Investors who bought shares in special purpose acquisition companies (SPACs) and their post-merger stocks have had a rough go of it in 2021. Stock prices for SPAC-related companies like AppHarvest, Nikola Motors, and Lordstown Motors are down strongly this year after disappointing investors with their first earnings reports and/or admitting to committing fraud. This has caused a lot of investors to be wary of the SPAC investing universe.

However, even though the space appears to have more than its share of bad businesses, there are a few companies that went public via a SPAC that are worth digging into. Enter Latch (LTCH -22.25%), a software and hardware company focused on making real estate safer and more enjoyable.

Here's why investors should put Latch stock on their watchlist. 

A person touching a digital doorknob.

Image source: Getty Images.

What is Latch?

Latch offers hardware and software for real estate developments, specifically targeting large apartment buildings. It sells internet-connected door locks that go onto every door in an apartment building, which are connected to the LatchOS mobile app. Residents are able to move in and out of their apartments and enter the building through a single app on their phone, which replaces the need for multiple physical keys, fobs, and door codes. Building managers find the LatchOS worthwhile because it helps speed up the tenant move-in process, keeps the building safer, and has all their day-to-day needs in one place.

Second-quarter numbers

In its latest results covering the second quarter of this year, Latch grew revenue 227% year over year to $9 million. This current revenue number is small, but since it takes apartment building owners two to five years and sometimes longer to get a building converted, Latch has a long delay before recognizing revenue even as it signs new contracts. To help investors with this delay, Latch gives out a bookings number each quarter, which quantifies the amount of future revenue signed under contract in the period. In Q2, total bookings hit $95.8 million, up 102% year over year.

Latch also hit 451,000 cumulative booked homes in the quarter, up 108% from 2020. According to management, apartment buildings pay $7 to $12 a month per door device for Latch, depending on how many Latch services they subscribe to. This makes cumulative booked homes a great proxy for Latch's future software revenue. For example, if Latch hits 1 million homes under management, and on average owners are paying $10 a month per device, that is $120 million in annual recurring revenue for Latch each year. With those 451,000 booked homes at the end of Q2, Latch is well on its way to hitting those numbers.

Growth opportunities in Europe and office buildings

Outside of its core market, which is residential real estate in North America, Latch has plans to expand to Europe and commercial buildings. In Europe, Latch will be aided by its SPAC sponsor Tishman Speyer, a real estate developer with millions of square feet owned on the continent. Tishman Speyer owns a large stake in Latch, so the two companies are well incentivized to work together.

Its commercial offering is only in a pilot program right now, but is being deployed at the Empire State Building and Rockefeller Center in New York City, which hopefully shows the ambitions Latch has for this segment. It is unclear right now whether its commercial product will see growth as rapid as with its residential offering, but the two markets have very similar needs that Latch can serve. 

Thoughts on valuation

With a market cap of $1.4 billion, Latch trades at a trailing 12-month price-to-sales ratio (P/S) of 49.6, which is quite expensive and may keep valuation-focused investors like myself from owning shares at the moment. But with the strong bookings growth Latch continues to put up, its revenue should skyrocket over the next few years, bringing down this valuation rather quickly. 

If you believe Latch can get to well over 1 million homes under management, which it looks like the company is well on its way to doing, a $1.4 billion market cap could look cheap a few years from now. Latch is no doubt a risky investment, but it is the one SPAC all investors should be putting on their watchlist