1 Potentially Explosive Stock to Buy in 2022

With so many high-growth stocks trading near or at 52-week lows, you may be searching for stocks on sale with robust upside potential. In this segment of Backstage Pass, recorded on Jan. 12, Fool contributors Trevor Jennewine, Rachel Warren, and Jamie Louko discuss one such promising stock. 

Trevor Jennewine: The company I'm going to talk about is Latch (LTCH -15.00%). If you're not familiar, Latch specializes in smart-lock technology. Its portfolio consists of hardware and software. The core product is LatchOS.

This is a full building-operating system that powers a range of devices like door-mounted access controls, delivery assistance, intercoms, cameras. For consumers, Latch makes it possible to unlock doors with the smartphone. You can grant visitors access, control various smart-home devices. It's kind of convenient, trendy.

Then for property managers and building staff, Latch makes it possible to control those access permissions remotely, which means you don't need as much staff on-site.

Like I mentioned, it also creates a premium experience for your residents to the extent that management believes those conveniences translate into increased revenue of $200 to $500 per apartment per year and reduced expenses of $100 to $300 per apartment per year. In 2021, the smart-lock industry is worth about $1.6 billion, but Grandview Research believes that will grow at 18% per year through 2028 to reach about $5.3 billion.

There's a big market opportunity. It's growing. Imperial Capital just put a price target of $15 per share on Latch, which implies about a 130% upside. The stock is down about 55% right now.

One of the driving forces is that with some of the supply chain constraints, apartment construction has tailed off, which means that Latch isn't getting its technology into as many new properties right now. But again, I think that's temporary and I think it will resolve. In terms of competition, the industry is very fragmented right now.

This is a nascent industry, still evolving. But the companies that do participate, a lot of them focus on part of the smart-building experience, so maybe they build software, but they don't make their own hardware. If you can plug your software into any hardware, the switching costs are pretty low there.

Or maybe they just focus on packaged solutions or smart-home products. But Latch takes this comprehensive approach. All of these services are provided through a single platform, and that makes the platform very sticky. In fact, the company has never lost a single customer, and that makes sense.

Once you get a door-mounted access control device installed, it is a pain to rip it out of the wall and replace it with something else. In terms of financial performance, the company is still very small, so revenue grew 120% to just over $11 million in the most recent quarter. Total bookings are at $96 million now.

These are clients' signed letters of intent saying that we're going to install your technology within 6, 12, 18 months. They're nonbinding, so they could back out.

But total bookings growing 181% implies that future revenue growth will be very strong. The company is still losing money -- net loss of $34 million in the most recent quarter, and that figure is widening. But Latch has a clean balance sheet. There's no long-term debt. 

They have over $320 million in cash and short-term investments. They can afford to burn cash for a while, while it scales. 

Then the company started in multifamily home units or apartments. It currently has over 531,000 booked home units, which is about a little under 2% of all the apartment stock in the United States, so plenty of room to grow there. Latch technology is present in one in 10 new apartment units, so they should see that market share trend upward over time.

The company also recently entered the commercial office-space industry, and they have some big clients in Manhattan like the Empire State Building. I like this company. Like Rachel mentioned, we don't invest with a short-term thesis. I would never invest in a company just because I think it could rise 100% in a year, but I do think that's possible with Latch. But more importantly, I like it as a long-term investment.

Trades at 27 times sales right now, so it's still expensive, and it's free-cash-flow negative, which means they might need to take out debt, which could be rough in a high interest-rate environment.

But long term, I think they have a sticky platform, solid competitive position. If I look 20 years down the road, I see smart-lock technology everywhere. I just think that's the way things are headed. I like Latch.

Rachel Warren: Go ahead, Jamie.

Jamie Louko: Trevor, I live about an hour away from a major city and about three hours away from a really big city like Boston, so I'm nowhere near anywhere where these Latch locks would be used. Have you ever met anybody that has these in their apartment or anything like that?

Trevor Jennewine: I have not, but I would be very interested to see how they work. They are really sleek looking. They almost looked like Apple devices mounted on the door. They have that consumer appeal. But I'd be very interested to see them, and I think that we'll see them more and more common in the future.

Rachel Warren: Yeah, I love differently both the companies that you brought. They fill these essential needs that I think, especially as we live in an increasingly digital age, that are going to come in really handy.

Riskified is filling this very essential need that e-commerce companies have.

And Latch, whether you are running a business or whether you're moving into an apartment, choosing a building, whether to house your office or your home, that is secure is incredibly important.

I think the thing I like about Latch, I just like the business, I like the technology that it is putting out there, and maybe we'll see some slower adoption. But I tend to think that this as well has a lot of potential.