The growth-heavy Nasdaq Composite is 29% off its high, and many individual stocks have fallen much further. But some analysts on Wall Street think the selling has gone too far where Latch (LTCH 2.78%) is concerned.
For instance, Barry Oxford of Colliers has a price target of $8 on Latch, which implies 250% upside in the next 12 months. Even more bullish, Tom White of DA Davidson has set a price target of $11.50 on the stock, implying over 400% upside.
Clearly, these analysts see something they like, but before you add Latch to your own portfolio, let's take a closer look at the company.
The smart building experience
Latch specializes in smart building technology. Its subscription software (Latch OS) powers smart locks, delivery assistants, intercoms, and cameras in a growing number of apartment buildings, rental properties, and commercial offices across North America. In fact, more than 10% of new apartments in the U.S are built with Latch technology, and many older buildings are being retrofitted with Latch devices.
The smart building industry is still nascent and highly fragmented, but Latch's broad ecosystem of hardware, software, and services distinguishes it from most other vendors. Specifically, the Latch mobile app allows residents to unlock doors, admit guests, and control smart home devices from a single location. And the Latch Manager app allows building staff to control access permission remotely, which streamlines resident onboarding, visitor access, and package delivery. In turn, that reduces the need for on-site personnel.
Financially, Latch is growing at a steady clip. Revenue climbed 106% to $13.7 million in the first quarter, but its GAAP loss widened to $44.2 million. Perhaps more concerning, management is now forecasting full-year revenue of $100 million at the high end of its range.
That figure is significantly lower than the guidance of $173 million the company provided at its investor day in 2020. In turn, that calls into question management's assumption that Latch will be free-cash-flow positive by 2023.
However, the macroeconomic environment -- with inflation at a 40-year high and rapidly rising interest rates -- is much different now. Fortunately, Latch's operating expenses grew slower than revenue in the most recent quarter, so the company is moving toward positive cash flow.
Until then, it has $264 million in cash and short-term investments left on its balance sheet to grow the business. Investors should watch this situation closely. With rates rising, it would be less than ideal to see Latch take on debt.
An unlikely price target
Latch has a massive market opportunity. In fact, management values the U.S. rentals market alone at $54 billion, and that figure doesn't even include the recent expansion into commercial office spaces or the company's potential push into the European market.
More importantly, Latch has a competitive edge. It takes a comprehensive approach to the smart building experience, which simplifies adoption for building owners.
Rather than working with a patchwork of vendors, Latch provides all of the necessary hardware, software, and services. And once the hardware is installed, it would be time-consuming and costly to replace it. In other words, Latch has a sticky product, and if its technology gains traction in commercial office buildings -- like it has in apartment buildings -- it could supercharge growth.
Can Latch deliver triple-digit returns in the next 12 months? I think it's unlikely in the current macroeconomic climate. The rising cost of materials will probably delay new construction and renovation projects, and that will translate into slower revenue growth for Latch.
That being said, smart building technology is the future, and Latch is a key player in that industry. With shares trading at a reasonable 5.4 times sales, now looks like a good time for long-term investors to buy this growth stock. Just know it could be a bumpy ride.