LSPD – A short-sellers dream

10.18.21

Short-sellers pounce…stock down 30%. Did LSPD’s screw up?

I’ve shared the following analysis with a few individuals and was asked to post it.  In short, I remain long LSPD.

Lightspeed Commerce, Inc (LSPD), a Montreal, Canada based company. I admit they have not historically been known for being incredibly organized in their reporting or on the Investor Relations side, though I thought they had improved leaps and bounds since the early days and since their US IPO debut in September 2020.  Finally, I have to mention and allow that with the recent flurry of a plethora of smaller company acquisitions over the past 18 months, things have no doubt been a bit chaotic and hectic for their accounting department.

Nonetheless, the company was attacked this month by a known, serial short-seller called Spruce Point Capital Management. Is the attack justified?   

I won’t get started on my very strong opinions regarding whether short-sellers should be allowed to flagrantly and often maliciously publicly attack a company with the clear intent of simply torpedoing the stock price of said company with a goal to profit on slandering such companies without any legal repercussions. Quite simply, most of the time I find it unethical and immoral, especially if/when the information is found to be false or materially incorrect.   Personally, I’d love to see a few of these short-sellers pay steep fines or even in some cases be sent to prison, but must reserve judgement in each case and on Spruce Point Capital in particular without first uncovering compelling evidence of wrongdoing or mal-intent.  Few would argue that most of these short-selling companies have a justified reputation for being sneaky, underhanded and vague for usually (at worst) misinterpreting or misrepresenting a company in their accusations.  The way in which they often purport said slander or misrepresentation, when unfounded or for ulterior motives, is reprehensible to me.  Either way, I admit to some small pleasure in the recent monetary disembowelment of some of these short sellers by the Reddit and meme stock crowd…there seems to be a fair bit of comeuppance justice to it all! (Please do NOT misread this as an endorsement of trading meme stocks or investing in any company without solid underlying fundamentals).

With that off my chest, I took some time to analyze one of the seemingly more obvious points (point number 4 of the letter) that was made in the letter from Spruce Point to Dax Dasilva, the CEO of LSPD.  I attach the entire letter, but for the purposes of this post, I will focus only on their point #4 below:

Initially, I thought this was simply absurd.  How on earth?  A reduction in their estimate from a $113B TAM (Total Addressable or Available Market) down to only a $16B TAM ?!   Is this a typo?  Hard to fathom.   Either someone on one side monumentally screwed up their calculation or else there is a massive misrepresentation by one side?!   

Like any former financial analyst, I started digging into the SEC filings and the company’s releases, prospectus and slide presentations.  Interestingly, as a Canadian company, they have to file in both countries and I found the info more user friendly on the Canadian Securities Administration website called SEDAR.  (Those darn Canadians…always so friendly…even in their SEC disclosures).  Tracking down the numbers in 4. above, I found the following in their pre-IPO slide deck:

OK.  That is loud and clear…they claimed a $113B TAM as of the date of this slide deck in June 2019, just prior to the IPO in September 2019.  To be fair, a very quick scan of the prospectus and IPO documents did not reveal this calculation or TAM number in other documents.  That is not to say its not there, but there were a LOT of pages.   Regardless, I calculate the TAM number above by taking the 47m retail & restaurants multiplied by their average figure of $200/month ARPU and multiplying that by 12 to get an annual $112.8B.  Check.   Then I note in the fine print below that the “Source:” of the 47 million retail & restaurants is “AMI Partners” and includes a whole plethora of companies 1-499 employees including banking, pharmaceuticals, telecomm, transportation and utilities??  Hmmm??  OK…lets bank that information for later.

I then went searching for the $16B more recent TAM number in the August 9, 2021 Prospectus.  The relevant page is below on page S-8 of the prospectus:

Uh, oh.  That is pretty loud and clear also!  But how can the two numbers be so different?  Well, the $113B number utilizes ARPU of $200/mo and the $16B TAM utilizes ARPU of $230/mo….certainly not enough and the numbers are moving in opposite directions.  Can’t be the mistake.  In this second document though, they rely on a “total market of approx $6m mid-market or complex SMB’s…”  Glancing again to the bottom of the August 9th, 2021 recent Prospectus page S-8, I note the footnote…”Based on 2018 data from AMI Partners.”   

Does one interpret this to mean their initial TAM was calculated using ALL SMB’s between 1-499 employees and this one only includes “mid-market or complex SMB’s”, a much smaller subset?  Did they screw up in their first assumption?   Or was it a mistake on the second one two years later?  I also found myself trying to make excuses or find a reasonable conclusion that would explain it…such as for instance thinking perhaps the second graph and prospectus was meant to be a smaller subset of the companies total TAM.  Nope.  (I included enough text above to conclude that it was supposed to be all their revenue sources, including all their recent acquisitions including ShopKeep, UpServe, Vend, etc.).  Stumped, I kept reading and came across the following statement in their recent 2021 prospectus separate from the graph and eerily similar to the info used 2 years prior in the IPO Investor Presentation:

Interestingly, this statement is just 8 paragraphs before the graph above?   Did they mean to take 226m SMB’s worldwide and left off the “22”?  Hard to fathom?   Or is 6m a subset of the 226m number that represents only the “mid-market or complex SMB’s”.  I admit I’m baffled and have sent this analysis to their investor relations department along with an invoice for the forensic analysis.  JK on the last part!

What do I think?   Well, they just screwed up. Besides not using a more current research report from AMI on their second prospectus (to quote Dr. Evil…Pretty standard really!), they certainly did not do the required homework or quality control prior to releasing the prospectus.  It happens to the best of them, though they are certainly still finding their footing as a public company navigating the many pitfalls that go with the territory.  I suspect the actual TAM (or something close to the actual number) is neither number, but at the least, it is clear to me from looking at some other similar companies (like Toast) that is MUST be significantly higher than the $16B number.  I find myself hoping for one of the following scenarios:

1. We (LSPD) admit we screwed up…pulled the wrong multiplier or whatever…and here is a more appropriate and supported number…and uhhh..using something more current than 2018, considering we have had a tiny little global snafu called Covid-19, which I highly suspect changed a few things in 3+ years.
2. IF they use 2018 AMI data, all retail and restaurants at 47m does not seem reasonable…I mean, really…including ”utilities” for example?   I guess they might have a revenue stream there, but it seems like a stretch.  6m (too low?) seems to have been pulled out of thin air, but at least give us the support for using that number.   Either way, with 226m SMB worldwide stated above in the last blurb of the prospectus is huge and I have to believe they have a MUCH larger TAM than just 6m, which is less than 3% of the SMB’s and equates to only $16B TAM.  
3. At the very least, (WO)MAN UP, put on your game face, pull up your socks, get yourself together, face the consequences and take the hit!!  Just let us know so we can move on.     

To conclude, I will just say that most assuredly PwC is reviewing each of these accusations very carefully and with a fine tooth comb.  If there are significant discrepancies, fraud or purposeful misrepresentation, it would not be uncommon for the quarterly 10Q and conference call to be delayed.  As they were able to get out a terse and concise letter denying the claims and they are apparently on schedule to release on 11/4 pre-market, I am optimistic their disorganization and sloppiness simply made them an easy target for Spruce Point to pounce.  TAM is an art that requires several major assumptions and can draw on many different analysis.  Revenue is a calculation strictly auditable and enforce by the SEC and GAAP and SAB 101.   I am very bullish that regardless of their estimated TAM, LSPD will release a very good revenue number and maintain their strong y/y growth trend, regardless of the actual TAM estimates.   As to some of the other accusations…well….duh!   Most fast growing companies are highly valued.   The company doesn’t decide the valuation and when you are growing as fast as LSPD, a higher valuation is not only common, most would argue it is deserved.   I remain invested in LSPD and added to the my position on the dip.   I hope I am not proven wrong and am looking forward to their results in a few short weeks.

Cheers!  -Poleeko