The last few months have been tough to swallow for high-growth investors. Many stocks are down double digits from their all-time highs, with some down as much as 50% to 70% in certain situations. In that latter bucket is real estate technology company Latch (LTCH 0.15%), which went public through a special purpose acquisition company (SPAC) last spring.
Latch stock is down 66% over the past year, but the company is expected to grow its revenue over 260% in 2022. Does that make the stock a buy right now? Let's take a look.
What is Latch?
Latch sells hardware and software products to residential and commercial buildings. Its core customers are large new apartment buildings, but it's also venturing into commercial properties. The company offers smart-lock doorknobs that go onto every locked door in an apartment building, which typically includes each apartment unit, outdoor entrances, and various amenity areas. Once these doorknobs are installed, they can be accessed online and with Bluetooth connectivity.
What does this do? For tenants, they can unlock any door they have access to in the building straight from the Latch app on their smartphones. For building managers and owners, they can better secure their buildings, save time and money replacing keys, and offer easy tools for package deliveries and guest management through the Latch software application.
Latch typically charges buildings $7 to $12 a month per smart lock with contracts lasting an average of six years. While these contracts provide reliable revenue for Latch, the company doesn't start collecting from customers until a building is up and operational. Since apartments can take years to build, Latch has a large backlog of future booked revenue signed under contract, but it may be a year or two before the backlog begins showing up on its income statement. This is important to understand before looking at Latch's financials.
Rapid revenue growth
Latch was only formed in 2014, so it's still a young company that's growing quite quickly. This means there's a mismatch between the bookings it's signing under contract and the revenue it's recognizing on its income statement. For example, in its third-quarter 2021 earnings report, revenue was only $11.2 million. Bookings -- the total contract value signed -- were $96.0 million in the period, up 181% year over year. Rapid bookings growth is important, because it will correlate highly with revenue growth in future periods.
This means investors have great insight into what Latch's revenue will look like in the coming years. And right now, analysts are expecting rapid growth through the end of 2023. In 2022, revenue is expected to grow 268% to $148 million, followed by 119% growth in 2023 to $324 million. If Latch can hit these rapid growth targets set by Wall Street, the business will be in great shape going forward.
Now, rapid revenue growth is not good in and of itself. Investors in Latch need to see what gross margin looks like, how much in sales and marketing the company is spending to acquire these customers, and the overall progress the company is making to achieve positive net profits and free cash flow.
What about valuation?
As of this writing, Latch stock has a market cap of about $800 million. This looks expensive compared to the company's current revenue base, but working off of the 2023 revenue forecast, its price-to-sales ratio (P/S) comes down to a very reasonable 2.5.
Some of this revenue will come from hardware sales, which currently carry a negative gross margin, but an increasing portion of the top line will come from software revenue, which carries gross margins of 90% or more. Since Latch brings customers in on long-term contracts, its software revenue from existing customers is also stable. Taking all of these factors into consideration, Latch stock looks very reasonably priced right now.
If you like buying high-growth stocks with a long-term approach, now could be a great time to take a position in Latch stock.