Smart-lock and real estate software company Latch's (LTCH 24.07%) business model holds one fundamental commonality with digital media player manufacturer and streaming platform Roku (ROKU 1.08%): Both companies seek to derive growth from operating lucrative subscription services tied to the devices they manufacture and sell.
However, an earnings miss and delays on product implementation led to Latch's stock price falling by close to 25% on the trading day after its Feb. 24 earnings report. Now, with Latch stock down more than 70% from its 52-week high, can its subscription service help the stock become the next Roku, or should investors avoid the SaaS stock?
Image source: Latch.
How Latch resembles Roku
Latch and Roku look like opposites at first glance. Latch sells access to an operating system (OS) for building management. It can connect devices such as locks, thermostats, and security cameras to centralize building management under one system. Hence, Latch has designed its OS to turn away most visitors. As a building management system, it wants to secure physical locations, denying access to everyone except those given explicit permission to enter.
Roku takes an approach with its OS that is the antithesis of Latch. As an advertising platform, Roku wants to attract as many visitors as possible. About the only things it wants to secure are programming viewers and clients who want to buy ad space on its platform.
But despite key differences, both OSs thrive by attracting more paying customers. To this end, each uses the same methodology to do this. Both offer equipment that ties users into an OS. The goal for both companies is to attract recurring revenue to subscriptions in their OSs, services that provide both companies high gross margins.
This approach has helped get Latch into more than three out of every 10 new apartment complexes in the U.S. Also, high-profile office buildings such as the Empire State Building and Rockefeller Center utilize Latch to control visitor access. Additionally, such deals can place dozens or even hundreds of Latch devices into each building. The difficulty of switching out equipment makes it more likely most customers will stay with Latch.
How the numbers compare
Through this approach, Latch increased its revenue in 2021 by 129% from year-ago levels, compared with 56% for Roku. However, Latch's revenue, which stood at $41 million in 2021, is a fraction of Roku's $2.8 billion during the same period. Furthermore, investors still turned on Latch, as its stock sold down by almost 25% following the earnings announcement, since the company missed on earnings estimates.
Supply chain struggles and construction delays cast doubts over its total bookings, the dollar amount of signed deals expected to turn into revenue in the next two years. Total bookings in 2021 rose 118% year over year to $360 million.
While that is close to nine times current revenue, Latch makes no guarantee those bookings will translate into revenue. Also, since the company announced its intent to stop reporting total bookings after March 2022, the company's outlook from a stockholder's perspective could become more uncertain.
Is Latch the next Roku?
Due to such uncertainties and significant differences in each business, calling Latch "the next Roku" is probably a stretch. Nonetheless, the earnings struggles will probably not stop Latch from driving revenue to a more lucrative subscription business, as Roku does. Admittedly, supply chain and construction delays could slow growth for a time and disappoint investors anxious for larger, quicker revenue increases. Nonetheless, with a fast-growing book of business and a product that is hard to switch away from, Latch could become a potentially explosive stock to buy in 2022.
