2022 has already been a rocky year, and it hasn't even been a month yet. Many investors are looking to buy high-growth and high-quality stocks at a massive discount while bolstering their portfolio with new stocks. Finding some under-the-radar names could help you do this and provide you with investments that are potentially not as over-bought as other more trendy investments.
Latch (LTCH 17.24%) could fit this bill. It is growing rapidly and seeing major adoption across the U.S. This under-the-radar stock is in the first innings of its potential, meaning it could skyrocket over the next decade and provide investors with life-changing returns. Here's why I think Latch is one of the best growth stocks you can buy today for 2022 and beyond.
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A new standard of security
Latch provides smart locks for apartment buildings, but the company doubles as a software-as-a-service (SaaS) provider as well. Its locks allow apartment tenants or anyone who needs access to an apartment or common space to access it with just their phone, rather than a key.
What I love about Latch is its software that allows managers to have an eye in the sky over their apartment complex. With LatchOS, landlords can manage tenant access, see tenant activity, and let in anyone from anywhere. Managers can save money on changing locks when a tenant moves out, but more importantly, they save time. Instead of going to unlock an apartment when a tenant lost their key or to let in a service worker, the manager can do it from the comfort of their office with a click of a button.
The financial benefits of having Latch installed are impressive. Latch customers can earn $200 to $500 more per apartment per year using Latch because of lower tenant churn . Managers can also save $100 to $300 on operating expenses from not having to buy and replace locks and the benefit of not needing additional security oversight. This, along with the time savings, has resulted in zero customer churn for Latch and a net retention rate of 154%.
With the major benefits it provides to apartment managers and its unique software, the company has seen major adoption. In the third quarter of 2021, the company had over $96 million in bookings -- which are nonbinding agreements to buy and install Latch products in apartment complexes once they are built -- representing growth of 181% year over year.
At the beginning of the growth story
Latch is still in its first innings as a business. Its 2021, the revenue estimate is $40 million, but the company sees massive growth potential from there. Latch believes its market opportunity is worth $54 billion in the U.S. and another $90 billion if the company can expand internationally.
Latch has partnerships with some of the world's biggest apartment builders, and with them, Latch has done a good job getting into new construction projects: 30% of new U.S. apartments that are being built today are being built with Latch. Considering the company's strong partnerships, I would expect this to continue.
Because this company is so young, however, there are plenty of risks. In the first nine months of 2021, the company lost over $112 million, which was 419% of its revenue over the same period. The company also had a free cash flow of negative $71 million.
Latch is directly affected by the supply chain shortages. Latch makes deals with apartment managers before the apartments are even being built, and those agreements represent the bookings. With these shortages, building apartments has been taking longer -- which is also becoming more expensive. The longer it takes for apartments to be constructed, the longer customers have to back out of the deal.
Why Latch is my favorite growth stock
Once Latch is installed into a building, its locks and software will likely be used for years (or decades), considering how hard it is to remove locks from buildings. This means customers likely won't churn away for a long time. Latch's software touts incredibly high gross margins of 90% -- so as the company's customers continue to pay for software, Latch's financial picture will strengthen.
This gives me the confidence that Latch will continue to grow rapidly for the foreseeable future, which will allow for significant multiple compression. The company is valued at 26 times sales, but if the company can continue growing at 100% year-over-year rates or more, this valuation will fall rapidly while still benefiting shareholders. There are risks for Latch, but I think that the growth potential, stickiness, and product benefits could result in Latch being a life-changing investment over the next decade.
