The Nasdaq Composite, which is heavily weighted toward growth, is 29% below its high. Many individual equities have tumbled much farther. Some Wall Street analysts, on the other hand, believe that selling has gone too far, with Latch (LTCH 6.80%) being one example.
For example, Colliers’ Barry Oxford has a Latch price target of $8, implying a 250 percent gain in the next year. Even more so, Tom White of DA Davidson forecasts that the stock will hit $11.50 and offer investors over 400 percent return in the following 12 months.
Clearly, these analysts see something they like, but let’s take a closer look at the firm before you add Latch to your own portfolio.
The smart building experience
Latch specializes in smart building technology. Latch OS is a cloud-based subscription software that manages 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 United States are constructed using Latch technology, and many older structures are being retrofitted with it.
The smart building sector is still in its early phases, and the market is extremely fragmented. Latch’s wide ecosystem of hardware, software, and services distinguishes it from other competitors. Residents may now use the Latch mobile app to unlock doors, admit guests, and manage smart home gadgets from a single location using the mobile app. In addition, the Latch Manager app allows facility workers to grant access permissions remotely, reducing on-site staff required. As a result, it cuts down on the need for on-site personnel.
Latch is progressing nicely financially. Revenue increased 106% to $13.7 million in the first quarter, but its GAAP loss swelled to $44.2 million. Perhaps more concerning, management now expects full-year revenue of $100 million at the high end of its range, which is a far cry from the over-$200 million projected by analysts in early May.
The company’s forecast for 2020—$173 million—was substantially lower than the one it provided at its investor day in 2020, which was $893 million. As a result, the assumption by management that Latch will be free cash flow positive by 2023 is called into question.
The economic climate, with inflation at a 40-year high and rapidly increasing interest rates, is also considerably different today. Fortunately, Latch’s operating costs grew at a slower pace than revenue in the most recent quarter, allowing the business to approach positive cash flow.
It has $264 million in cash and short-term assets left on its balance sheet to develop the firm. Investors should keep a close eye on this situation. Latch taking on debt would be less than ideal with interest rates increasing.
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