Latch Stock : The company that makes smart locks has just laid off a massive part of its workforce and continues to reduce their forward-looking guidance.
The years 2020-2021 saw the birth of SPAC. They were referred to as special purpose acquisition companies These investment vehicles assisted numerous companies to get public fast during the post-pandemic boom in stock prices. Many of these companies presented huge investor pitches declaring that they will grow their revenue by three-digits over the next few years, and gaining high valuations as a result. One of them is Latch (LTCH) that is an innovative company that makes smart locks that is designed for apartments. Investors have been hesitant about the stock because it hasn’t been able to fulfill its growth expectations.
In just a little over an entire month, Latch shares have dropped about 80percent from its SPAC merger price and is now trading at $2.13 per share as at the time of writing. What has gone wrong for Latch over the past twelve months?
Margin and growth are below expectations
Latch is an IT and hardware company that provides residential apartments equipped with smart-lock technology. The landlords pay monthly for a subscription so that homeowners can unlock and lock their doors with their phones, which saves them time and money when managing the building and increasing security.
Within its SPAC Investor Presentation, Latch stated its aim serving millions of apartments across the nation, and expects to generate nearly one billion dollars of net revenues in 2025. Latch also claimed that it would bring in $250 million of annual free cash flow in that year. The bulk of this cash flow free would result via the estimated $412 million of gross software revenues Latch forecast for 2025 which is a massive jump from the $400,000 it earned in 2020.
These projections have proved to be optimistic. The year 2021 was the worst for Latch. Latch just raked in $41.4 million in sales, which was well less than the $49 million mark it announced in its presentation to investors. In the coming year, it is expected to earn between $75 million and $100 millions in revenue, as compared with its $173 million target just a year earlier.
In terms of margins, Latch originally expected cost of revenue to drop by 69% its net revenue in 2022 , as its software business with a high margin grew. In the first quarter of 2022 the the cost of sales was just a little less than revenue, which means Latch has extremely low gross margins right now. With operating costs that were high at $51 million, it led to an overall loss of $44 million during the second quarter alone.
Headwinds to macroeconomic growth
What is the reason why Latch’s finances have fallen short of expectations? The most obvious reason is that the management was overly optimistic. I believe that this could have played a part. However, another reason for slowing expansion is macroeconomic context.
Latch does not begin to generate software revenues from customers until a building is complete and operational. Due to supply chain issues that cause delays in construction across the nation Many of the structures Latch was expecting to be completed at this point are in construction, which means they aren’t generating revenues. This puts Latch under pressure as it continues to fall short of its growth goals.
With massive losses every period, Latch is one pace to exhaust its SPAC investment in a couple of years. To alleviate the pressure until it is able to produce an income stream that is positive, the business is forced to reduce on its workforce by laying off employees.