There is no shortage of companies operating in the smart-home technology industry, but Latch (LTCH +20.00%) is different. In this Fool Live video clip, recorded on Sept. 27, Fool.com contributors Jon Quast and Danny Vena explain why they both have such a positive opinion on this innovative business.
Jon Quast: Well yeah, Matt, this is actually my favorite stock right now. To your point, I own it as well. I recently made it a top 10 position in my portfolio because this is such an interesting business that I think that the market has seriously misunderstood because of the dynamic that you just explained. The difference between the hardware profit margins and the software profit margins.
As you look at those contracts that they have in place for the software, it's going to play out over multiple years once that apartment building gets built. For some of these, maybe all of them, but as my understanding is, this is something that the landlord builds into the lease agreement. The tenants are paying on the software revenue, so there's not really going to be a lot of churn, there should not be. I really expect that these projections will come in with any management team. It's not uncommon to give three-year projections, five-year projections.
All of those I take and say, "What have you done in the past with what you said you were going to do? Did you get what you said you were going to do in the past? If so, that gives me a lot of confidence that you are credible management team going forward." For Latch, we didn't have that out the gate. But in the first two quarters, they've actually exceeded their booking's guidance. Now, revenue, they don't control. Some buildings have been slowed down in the build because of what's going on in the labor market, which is keeping revenue from coming in because the apartments are completed yet. However, those bookings, they do control and those are coming in ahead of schedule.
I really like where this management team is going over the next five years, what they said they're going to accomplish based on what they've accomplished so far. For me, yeah, I think it is going to be a big profitability, big free cash flow machine as this plays out over the next 5-10 years.
Danny Vena: I ranked this one pretty highly too. What was interesting to me, and I knew nothing about this company before the show started. I actually looked into it in preparation for the show. Having lived in an apartment when we first moved to California several years ago, one of the things that I experienced firsthand is the fact that there are so many little inconveniences that you deal with living in apartment, like when you get a delivery from Amazon.
Do they bring it through the gate or do they leave it outside the gate, do they bring it up to your door. This is one of the things that this company handles. Another thing is, every time you lose a key, then you've got to go to the apartment manager, and then they either have to cut you another key or they have to change the lock. As soon as somebody moves out, they have to change the lock. This is where you can go in, and just quickly, with a few lines of computer code. Bang, all of a sudden, those costs are eliminated permanently, more or less.
I like the fact that they are setting themselves up in a Software as a Service market, where I can see that once they get enough people onto this, I could also see this expanding beyond apartments and into offices, into hospitals. There's so many different ways that they could deploy this technology, so I see this as a much bigger opportunity than what we're seeing right now. I think this is a company that I'm definitely going to pay attention to moving forward.
