The past few months haven't been kind to companies that went public via SPAC, but there are some excellent opportunities in this group that patient long-term investors might want to take a look at. In this Fool Live video clip, recorded on Jan. 24, Fool.com contributors Jon Quast and Matt Frankel discuss why Latch (LTCH +0.00%) could be a smart stock to buy after the recent downturn.
Matt Frankel: Jon is going to talk a little bit about Latch ticker symbol L-T-C-H.
Jon Quast: Yeah, Latch and so let me pull up again the chart here with Latch. As you can see. Oh no that's PubMatic (PUBM 1.17%). This is Latch. We are 60% off the high basically.
What does Latch do? We've talked about it so many times here on Motley Fool Live and "Motley Fool Backstage Pass," but Latch has the smart door lock for landlords or the customers. They put them into their multi-family properties, and then the tenants wind up paying an ongoing monthly subscription to the Latch operating software.
So, there's both hardware revenue and software revenue. The hardware is sold at a loss. The software comes at 90% gross margin, so very different profitability depending on which side of the revenue segments we're talking about here. But one of the things that I really like about Latch, and I'm not going to show the valuations there on the chart because I don't think it's really going to bear it out.
This is from their special purpose acquisition merger presentation, and one of the things that you could either like it or not like it with SPACs is that they project typically multi-year, very far into the future, and take it with a grain of salt, sometimes it's over-the-top, bombastic what they're projecting. But it is something that you can hold companies accountable for, and so as we look at Latch, 2021 is in. When they went public, obviously they didn't know, their revenue has come in light from what they originally projected. Their bookings have come in ahead of guidance, and also the cumulative booked homes.
What this tells us is that Latch is doing the first step of their business model which is sign up new properties that are going to use its hardware, and then in the future, it will be able to collect the software revenue. What hasn't happened is many of the companies that have signed on with Latch because of supply chain shortages, labor shortages, and everything else, they haven't been able to finish their projects on time, and so Latch is one of the last things that goes into these new builds, and it winds up not being able to be counted as revenue because the project isn't complete and it hasn't been installed.
Now, if you look at this fundamental here, the bookings, that is ahead of schedule and trending in the right direction. Let's give them a lot of credit here for what they can control. The cadence of the new construction completions is outside of their control. But if they're booked and being built, it's a very, very high probability, it's going to come out in revenue. Now, if you go fast-forward, over time, they are burning cash right now. But the software revenue, like I said, 90% gross margin will overtake hardware revenue in time, is the plan. If you fast-forward to 2025, they're saying $250 million basically in free cash flow because software revenue is going to make up a greater percentage of the revenue mix than it does today.
This is an $800 million company right now. What would you give a company growing at 50% in a year and having $250 million in free cash flow? Would you put a 10x multiple on the free cash flow? Would you put 20x? This is an $800 million company right now.
Frankel: At that rate, I would probably put 20-30 times multiple on it, whatever the market conditions were at the time.
Quast: So, if you gave it a 20x multiple on that free cash flow, we're a $5 billion company in 2025, and this is $800 million today. Now, what if it's only halfway there? This is still a multibagger. I love Latch right now.
