Is Latch Stock A Good Buy?

SPACs are the latest Wall Street trend – as of early Q3 89 SPAC mergers had closed, making 89 brand-new stocks available for trading. So many companies going public at the same time presents a “choice” issue for investors. Which companies are worthy of your investment dollars?

One of these former SPACs, Latch (LTCH) shows strong promise. So, is Latch stock a good buy?

What Is Latch?

Latch provides hardware and software in the real estate sector, and specifically targets large, multifamily units.

The company provides door locks that connect to the internet and are placed on each door in the complex, which are then connected to LatchOS, the company’s mobile app.

Rather than fumbling for keys or fobs or struggling to remember the door code, residents can come and go, locking and unlocking their doors through Latch’s mobile app. Managers of large buildings enjoy the Latch program because it helps with:

• Speeding up move-in for new tenants
• Building safety
• Keeping all needs streamlined in one place

How Latch Works

Your computer, tablet, and mobile phone are all powered by operating systems. LatchOS aims to be the operating system for large, multi-unit complexes. It replaces keys for every door on the premises.

The LatchOS mobile app is free for residents, and it allows building owners and managers to offer “smart access” to all their units. Say a resident moves out: Instead of having to hunt down keys and physically change door locks, a building manager can simply restrict access to the old resident and grant access to the new resident.

As part of Latch’s SPAC presentation, the top brass claimed that around 10% of new multi-unit buildings use LatchOS. Depending on the services that building owners choose, the cost of the service is between $7 and $12 each month per door/apartment.

Why would a building owner be willing to pay so much? Because Latch should offer residents a better experience overall, allowing owners to rent apartments and offices at higher, per-month rates. Not to mention, building operations run more efficiently once the building is connected and access is controlled.

Latch Business Model

The visibility provided by Latch to building owners is clearly valuable. It has allowed building owners to increase rent and decrease other expenses. This is one reason why customers didn’t mind the over 50% price hike compared to just one year ago – in fact, Latch hasn’t had any churn at all since 2017.

Although hardware is required, make no mistake about it, Latch is a SaaS company charging a monthly “subscription” fee for its services.

All of the company’s customers must sign an agreement for installation before buildings are constructed. In some cases, it takes as long as two years before the building is completed.

As of right now, many of Latch’s customers have yet to complete building. It’s for this reason total bookings are likely being underestimated. These are the number of total installation agreements and are key to understanding Latch’s success – more so than revenue growth.

In Q2 2021, bookings grew by more than 100% from Q2 2020, jumping to $96 million. Booked homes grew to more than 450,000 homes. The revenue for Q2 2021 from software (gross margin, 90%) grew 119% YOY.

Now, total gross margin for Latch is only 9%. Why?

Latch loses money on the physical locks because many of its total bookings are customers who have yet to complete builds – so they aren’t paying for the mobile app software yet.

As more units come online and begin paying for the app’s software – the subscription fee – expect this revenue to eventually supersede the hardware line item. While net income and gross margins may not look pretty right now – the company actually lost to the tune of $40 million in Q2 – the future is bright.

Currently, Latch is going into three of every 10 new apartment builds in the United States, showing just how rapidly this tech is being adopted. As Latch matures and begins seeing stronger recurring revenue, its financial position should improve.

Latch is still young and hasn’t even touched the surface of its $90-billion-per-year addressable market. Its current market cap is just $1.3 billion – if Latch can continue retaining customers while signing new ones, it has the opportunity to multiply that figure.

Speaking of Latch Revenue and Earnings…

Results from Q2 show a revenue growth of 227% YOY to $9 million. Sure, this figure is small in the grand scheme of things, but because it can take anywhere from two to five years to build a multifamily apartment building, the company has a blank period before it can recognize the installation agreement revenue, even while continuing to sign new agreements.

To assist its current and would-be investors, the company provides total current booking numbers every quarter, which helps investors quantify future revenue signed for in the previous period. Q2’s bookings hit $95.8 million, a 102% increase YOY.

The company also raised its cumulative bookings to 451,000, up 108% YOY.

If Latch hits a million units under management, and the average owner pays $10/month/device, that’s $120 million in yearly recurring revenue. Latch is on its way to trouncing these numbers.

Latch’s Competitive Advantage

Latch is focusing on three different categories outside the North American core market:

• Commercial office space
• Residential services
• European markets

Latch released its commercial office locking hard- and software recently, targeting an even larger swath of the real estate industry. LatchOS options such as Smart Access and Delivery Management can be used by commercial buildings. It’s a logical step for the company and could boost its upcoming bookings growth in the next several years.

Residential customers can expect to see new services added to the mobile app. For instance, in the SPAC presentation, Latch said it plans on offering items such as renter’s insurance and access to internet service via LatchOS. Eventually, the plan is that residents shouldn’t have to look any further than the app when moving to a new apartment.

Finally, as the next stage of growth, Latch has expansion plans into European nations. Real estate giant, Tishman Speyer, owns the SPAC that merged with Latch and plans to use Latch for the 93-million-strong apartments located throughout Europe.

Latch Valuation

Most of today’s SPACs tend to trade at lofty – even, nosebleed – valuations. Share prices from July through now look more like plans for a new rollercoaster at the latest amusement park. LTCH is trading at a $1.8 billion market cap. There’s $500 million cash on the company balance sheet and an enterprise value over $1.3 billion. This appears extreme given quarterly revenues, but you have to remember how future bookings will affect future revenues.

Is Latch Stock A Good Buy – The Bottom Line

Management predicts $249 million of annual FCF by 2025, so that current market cap – even if it raises a bit – could look cheap in just a few years. Latch (LTCH) could be an attractive addition to your long-term portfolio.

Based on the current discounted cash flow forecast model, Latch has upside to $13 per share, representing a potential gain of almost 45%.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.