Many investors may regret missing out on Roku (ROKU 1.58%) and its gains of over 800% since its 2017 IPO. What looked like an equipment stock competing with the likes of Amazon and Apple was actually an ecosystem at its core. It not only compiled the free and premium streaming channels consumers wanted but also enabled advertisers to reach their desired audiences.
Latch (LTCH) offers many similarities to Roku's business model. While not in the content or ad business, Latch is similar to Roku in that it uses its equipment to engage with an ecosystem. With a high level of bookings and a low stock price, it could give investors who missed out on Roku a chance to profit from a potentially lucrative revenue-generating ecosystem.
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What is Latch?
On the surface, Latch merely looks like a company that sells goods such as door locks, cameras, intercoms, and sensors. By themselves, these products are neither new nor innovative and would likely not attract investors.
However, the common thread to these products is their integration with Latch's building operating system. This OS allows an independent entity to operate building security and functions remotely.
Such a system can eliminate the need to dispatch personnel to manage building access or functions, saving building operators money and bringing fundamental and permanent change to the operation of large buildings. Also, this software-as-a-service (SaaS) platform is available by subscription, which translates into recurring revenue for investors.
The Latch OS will serve apartment complexes and commercial buildings. Through this, an apartment can manage permissions for tenants to enter the building and specific units, and grant limited access to visitors such as couriers. It also allows a renter to open his apartment via a smartphone and to control lighting, climate control, and other functions within a unit.
According to the company, approximately one in 10 new apartments now runs on Latch's OS. Moreover, the company has developed technology to retrofit older buildings, dramatically expanding its addressable market. This has helped Latch gain contracts with high-profile locations such as the Empire State Building.
Latch's financials
Since Latch has only traded on the markets since June 7, its stock has not yet developed an extensive history. Nonetheless, its $27 million in revenue for the first nine months of 2021 surged 154% compared with the first three quarters of 2020. With a $26 million cost of revenue and operating expenses doubling, losses for the first nine months of 2021 came in at $112 million. This compares to a loss of $47 million during the same time frame in 2020.
Nonetheless, the number that investors should look at is total bookings, or the total amount of hardware and software commitments expected to convert to revenue within the next 36 months. Bookings came in at $96 million for Q3 alone, 181% above the year-ago levels and nearly 3.6 times the total revenue-to-date for 2021.
Moreover, the company forecasts $91.5 million to $101.5 million in fourth-quarter bookings and $355 million to $365 million in total bookings for 2021. That result would amount to a 118% increase at the midpoint. It also forecasts 2021 revenue of $38 million to $42 million, implying that the triple-digit growth trend should continue.
Latch's critical near-term challenge
However, the company stated in its earnings report that "the Company might not realize all or any part of the anticipated value reflected in its Total Bookings."
Knowing this, the stark difference between bookings and revenue could make more impatient investors leery. Supply chain issues have also delayed construction projects, which could slow the company's revenue growth, according to Goldman Sachs. As a result, the stock has fallen by over one-fourth since its June IPO.
Also, the price-to-sales (P/S) ratio now stands at 35. This lofty valuation could leave investors questioning whether Latch is a bargain after earnings, especially if bookings translate into revenue too slowly.
Still, current customers bring more certainty than the promised order bookings do. On that note, the company reported in August this year that it had never lost a customer since the beginning of its operations in 2017. Considering the cost and inconvenience of replacing equipment, switching providers becomes a more difficult task, making it less likely current customers would leave the Latch ecosystem.
Should I consider Latch?
Indeed, Latch could become the building OS of choice in much the same way streaming customers have turned to Roku's media-streaming ecosystem. Such a system can save building managers time and money while enriching investors.
Moreover, both the revenue and bookings point to massive growth in the recent past and near future. Even if bookings do not always translate into revenue for the SaaS company, Latch's potential to fundamentally change a substantial industry could bring outsized gains as it becomes the Roku of building management.
