Property-technology company Latch (LTCH 7.14%) has flown under the radar since it went public via a special purpose acquisition company (SPAC) in June 2021. Its market capitalization is currently under $1 billion.
Latch went public as a small-cap stock and has only gotten smaller as its stock price plummeted. For context, almost all SPAC deals are negotiated at a $10 share price, but as of this writing, it trades around $6 per share, down over 40% from its first-day close. However, I don't believe this discount will last for long -- here's why 2022 will be a breakout year for the company.
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Why Latch stock is down
Latch offers two products for landlords. The first is hardware: a smart-lock device. The second is an ongoing subscription to the operating software. Typically, the hardware is installed in new builds, and its cost is easily absorbed into the total cost of building the property. Meanwhile, the cost of the subscription is passed on to tenants. Therefore, there's not much downside here for Latch's landlord customers.
By contrast, there is upside. Landlords can charge more in rent, because they're providing a premium product to tenants. Moreover, it can reduce expenses. Without a smart lock, landlords spend time and money helping tenants when they get locked out. Changing locks after tenants move out is also costly, so with Latch's hardware, landlords can boost their profits.
When Latch went public, management predicted it would generate $49 million of revenue in 2021. This compares favorably to revenue of just $18 million in 2020, but the company will most likely miss that target. Through the first three quarters of 2021, Latch has generated revenue of $26.8 million, and it only expects to report $15.2 million in the fourth quarter at the high end of guidance, which would result in full-year revenue of $42 million -- far short of its initial outlook.
Investors have lost patience with the stock for this reason. Its revenue growth isn't what was expected, and there's also fear that the company doesn't have much time to see its vision come to fruition. Through the first three quarters of 2021, it reported a net loss of $112 million. For context, it only had $240 million in cash and cash equivalents as of Sept. 30.
Latch's performance since going public relative to the S&P 500. LTCH data by YCharts.
Why Latch could be a great stock in 2022
Here's something important to keep in mind about the company. As already mentioned, Latch's hardware products are installed primarily in new builds. But door locks are one of the last things installed. Unfortunately, Latch can't count it as revenue until the installation physically happens at the end.
However, residential construction is facing historically lengthy delays. Projects are being pushed back for months due to supply chain shortages, inflation, and labor shortages. In short, Latch's customers are starting projects but can't finish them on time. And in the meantime, the company can't count real hardware sales as revenue and can't start collecting software revenue.
To be clear, there's no problem when it comes to Latch's adoption. Installation contracts are measured by bookings, and its bookings are well ahead of schedule. It's expecting to finish the year with at least $355 million in bookings, up 15% from its original guidance and up 115% from its bookings in 2020.
Furthermore, permits for new construction are coming in strong, according to the Census Bureau. This suggests that Latch has a great opportunity to continue signing up new customers at a faster rate than expected.
Construction projects might not be finishing on time, but they will finish at some point. And when that happens, Latch will be able to start converting strong bookings into revenue.
Regarding Latch's cash situation, it intentionally sells its hardware products at a loss. Therefore, it's not surprising to currently see it with a substantial net loss. However, its software has around a 90% gross profit margin. Net losses are expected to continue in 2022, but in 2023, software revenue should overtake hardware revenue and make the company free-cash-flow positive. In short, I believe it's sufficiently capitalized to reach this turning point.
The stock is down because revenue has come up short of expectations, but this is a temporary situation due to macroeconomic challenges. I expect those headwinds to abate in 2022 and Latch's revenue growth to take off. This could cause the stock to break out. And if not this year, then I expect it will break out in 2023 when its cash flows turn around and surprise investors who weren't paying attention to the transformation happening beneath the surface.
