LTCH

What Went Wrong With Latch Stock?

2020 and 2021 were the years of the SPAC. Called special purpose acquisition companies, these investment vehicles helped hundreds of companies go public quickly in the post-pandemic stock boom. A lot of these stocks put out huge investor presentations saying they would grow revenue in the triple-digits for the foreseeable future, garnering expensive valuations in the process. One of these stocks was Latch (NASDAQ: LTCH), a smart-lock technology company for apartment buildings. But investors have soured on the stock as it has failed to meet its growth projections.

In less than a year, Latch stock has fallen around 80% from its SPAC merger price, and now sits at only $2.13 a share at the time of this writing. What went wrong for Latch in the last 12 months?

A person touching a smart-lock on a door.

Image source: Getty Images

Growth and margins below expectations

Latch is a hardware and software company that serves residential apartment buildings with smart-lock technology. Landlords pay the company a monthly subscription fee so residents can lock and unlock their doors through their smartphones, saving them time and money managing the building while also making it more secure.

In its SPAC investor presentation, Latch outlined its goal of serving millions of apartment units around the country, expecting to generate close to $1 billion in net revenue in 2025. It also said it would generate $250 million in annual free cash flow that year. A lot of this free cash flow would come from the $412 million in net software revenue Latch projected in 2025, which was a huge leap from the $4 million it generated in 2020.

So far, these expectations have proven to be optimistic. In 2021, Latch only generated $41.4 million in revenue, well below the $49 million goal it set in its investor presentation. This year it expects to generate $75 million-$100 million in sales, compared to its $173 million goal less than a year ago.

On the margin front, Latch originally expected cost of revenue to decline to 69% of net revenue in 2022 as its high-margin software business scaled up. In Q1 of 2022, cost of revenue was only slightly less than revenue, meaning that Latch has abysmally low gross margins at the moment. With high operating expenses of $51 million, this led to a net loss of $44 million in Q2 alone.

Macroeconomic headwinds

Why have Latch's financials been below expectations? The simple answer could be that management was too optimistic. I think this played a role. But another factor in slowing down growth is the macroeconomic environment.

Latch doesn't start generating software revenue from customers until a building is finished and becomes operational. With supply chains creating construction delays across the country, many of the buildings Latch expected to be finished by now are still under construction and therefore not generating revenue. This is putting pressure on the company as it continually misses its growth expectations.

Staff reductions

With huge losses each quarter, Latch is one pace to blow through its SPAC investment within a few years. To mitigate these pressures until it reaches enough scale to generate positive cash flow, the company has had to cut back on its workforce through layoffs.

Earlier in May, the start-up cut 30 people -- approximately 6% of its staff -- in a widespread layoff. Then, around a week ago, management announced an even bigger layoff of 130 people, or 28% of its staff. These are huge cuts that will save an estimated $40 million in costs a year.

While this will be good for the bottom line, large layoffs are usually a sign of desperation and that things are not going according to plan. I think we can assume that is happening with Latch, and is a big reason the stock is barely above $2 a share at the moment.

Don't give up on Latch just yet

Things look dire at Latch right now, but I don't think investors should disregard the business. It is still growing revenue at a fast pace of over 100% year-over-year, and seems to have found great product fit within apartment buildings. It also has a huge cash pile to help it weather any downturn without running the risk of bankruptcy anytime soon.

If Latch is able to go through this tough period and come out intact on the other side, the stock could become very attractive given the huge market opportunity it is going after. Of course, we don't know what will happen over the next few quarters, but I think it would be smart to at least keep Latch stock on the watchlist for now.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Latch, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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