Shares of recent special purpose acquisition company (SPAC) IPO Latch (LTCH -23.81%) took a tumble following a downgrade from Goldman Sachs. Due to delays in construction projects and other complications from supply shortages, the Wall Street analyst thinks Latch is having to offer bigger discounts to customers than previously expected.
The stock is now 31% off of its all-time high since its SPAC merger earlier this year, and the concern pointed out by Goldman Sachs should give some investors pause. But Latch was never going to be a fast moneymaker. If you believe in the company's vision, there are still ample reasons to believe this real estate technologist could be a long-term winner.
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One reason to sell
Latch has earned minimal revenue this year. Total sales in the second quarter were $9.0 million, a paltry sum for a company with an enterprise value currently sitting at $920 million. However, Latch is inking all sorts of deals with developers to get its hardware -- and more importantly, the software packaged with it -- into apartments. As of the end of the second quarter, Latch said total bookings (non-binding agreements for purchases of hardware and software) totaled $167 million, up 96% from a year ago.
But here's the quibble Goldman Sachs had: Current deferred revenue (an advance payment made for services or goods under contract that have yet to be delivered) was only $3.69 million at the end of Q2, up just 58% from last year. Longer-term deferred revenue was $16.9 million, up just 28%. These two line items (filed on the balance sheet as liabilities) indicate that actual realized revenue is still trending in the right direction, but not at the same torrid pace as the non-binding bookings might indicate.
Long story short, Latch may not grow as quickly as some of us may have expected a couple of months ago.
Three reasons it might still be a buy
Latch will update investors on its third quarter 2021 results on Nov. 9, and management will no doubt shed some light on the current situation. Nevertheless, there are a few reasons for optimism.
1. Still trending in the right direction
As previously mentioned, Latch was never going to turn into a large tech firm overnight. This is, after all, a company still in start-up mode. This was always a multi-year story, and we're still in the early chapters. Deferred revenue indicates actual realized revenue could remain meager the second half of this year and into early 2022, but it's still trending in the right direction. Though it's working from a small base of sales right now, Latch still looks like a high-growth business.
2. A massive market that could use some automation
Latch is aiming to bring some serious automation to the residential rental market. It claims to save apartment complexes an average of $100 to $300 per apartment in operating expenses each year. In an industry with little wiggle room to boost profit margins, it's no wonder Latch's system is picking up plenty of interest (again, as reflected in near-doubling year-over-year bookings).
Besides the thousands of apartment complexes out there, Latch more recently extended its platform for use in commercial properties too. This is a tiny company operating in a huge global industry, so it won't take too many properties for Latch to start generating robust sales. It just might take another couple of years to get there.
3. Plenty of cash on hand
All small businesses face daunting odds, and innovating great tech that addresses customer needs is the best way to stay ahead of the big business steamroller. Latch has picked up a small amount of momentum, but it will need to stay aggressive to really take off.
That's where cash comes in. As of the end of June, Latch had $472 million in cash and equivalents on hand and no debt. Sure, free cash flow was negative $37.1 million through the first six months of 2021, but it can afford to stay aggressive for now to promote further expansion because of all that liquidity.
Beneath uncertainty lies potential
I'm not trying to make the case that Latch stock is a surefire buy right now. If you aren't into taking a chance on small emerging businesses, pass. And if you are, remember to keep your purchase small (as disclosed before, my stake in Latch is still far less than 1% of my portfolio's value). But after the recent drubbing it's endured, this cloud computing outfit for the real estate industry looks like an intriguing buy to me despite the current uncertainty.
