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Here's My Favorite SaaS Stock Now

By Matthew Frankel, CFP® – Oct 6, 2021 at 6:13AM

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This is a small tech company now, but that could change in the next few years.

Property technology company Latch (LTCH 0.29%) is a relatively small company now, but it has a massive market opportunity. With proprietary hardware and an interesting recurring revenue business model, Latch has quickly become my favorite software-as-a-service, or SaaS stock, as I (Motley Fool contributor Matt Frankel) explain in this Fool Live video clip, recorded on Sept. 27

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Matt Frankel: This is Latch, a company that I own shares of. One of the rare stocks that I actually bought shares shortly after its IPO. Why do we all like Latch so much? I don't want to put words in the other guy's mouth, but there's a huge opportunity here.

If you look at Latch's numbers, it doesn't tell the whole story. If you look at Latch's valuation, it was about in the one billion range. I want to say about $1.5 billion right now. They did $9 million in revenue last quarter, that sounds like a minuscule number. The real number to pay attention to is bookings. Latch's sales what's called a building operating system.

They're one of the few smart home companies that participates both in the hardware and software side of the business. They sell their operating system as a Software as a Service, they also sell their own proprietary smart locks and other hardware that only work with their platform. That's one big differentiator between Latch and a lot of their competitors.

Bookings is the number to pay attention to because when an apartment building is being built, it might take two years before the first tenants move in from when they break ground. They'll sign an agreement with Latch. "Okay, we'll install all your locks, we'll pay a subscription fee for your platform." etc. They might have that signed agreement in place with a 10-year contract two years before they ever see a dime of revenue from it. That's why the bookings really gives you more insight into future revenue.

Right now, they have $48.8 million of annual recurring revenue booked as of the second quarter. That grew over 120% year over year from 2020 levels. It's growing really fast, they're doing a great job of booking new units. They recently went public through SPAC, they combined with a SPAC run by Tishman Speyer, which is one of the biggest real estate managers in the world. Just to name one property that you might have heard of, they are the commercial real estate company that runs Rockefeller Center in New York.

Latch has had tremendous success with apartments, they partner with companies like AvalonBay (AVB -0.92%), one of the biggest department developers in the country. On the commercial side, obviously Tishman Speyer is a great partnership they have. They also have their product in the Empire State Building, one of the more recent accounts they've got. With all their SPAC proceeds, that's where they really planning on doing. Building out their office side of the business and expanding into Europe where they have really haven't tapped into yet.

Here's the key point why I love Latch's business long term. Currently, Latch's revenue is about 80-20 split between hardware and software; 80% came from hardware revenue, 20% came from software. The hardware revenue is at a negative 12% gross margin, the software revenue is at a 90 percent gross margin. The idea is that over time as they sell more and more hardware and get more and more buildings in their ecosystem, the recurring part is going to steadily climb and eventually overtake the hardware revenue.

With a margin over 90%, which should only get better as it scales, that's really going to be very high profit business and there's a huge addressable market opportunity here.

Matthew Frankel, CFP owns shares of Latch, Inc. The Motley Fool owns shares of and recommends Latch, Inc. The Motley Fool recommends AvalonBay Communities. The Motley Fool has a disclosure policy.

Stocks Mentioned

Latch Stock Quote
Latch
LTCH
$0.91 (0.29%) $0.00
AvalonBay Communities Stock Quote
AvalonBay Communities
AVB
$172.57 (-0.92%) $-1.61

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