Hi everyone,
I would like to have a go at balancing out the increased amount of negative commentary here lately with my analysis of the business.
Many of your criticisms are fair. Two of the most important, I believe are:
- Expenses Management: In my view, LVT's expenses management does appear to be a little out of control, which aligns with the fact that management KPIs are almost entirely focused on ARR growth and the CFO is based here in Australia, rather than next to the rest of the frontline management team in the States.
- Dilution from the cash raise: >20% dilution, in isolation, is of course never nice. And the amount they've raised, based on their ordinary course of business does seem excessive
However, I am of the view that the recent focus on the above developments are leading many of you to lose sight of the fact that this is a Growth Stock with incredible potential for which the two most important considerations should be: 1) the growth trajectory; and 2) profitability at point of maturity.
Here's a simplified example to illustrate my point.
Growth Trajectory: Let's say that for the sake of conservatism LVT's growth begins to slow down and they fail to reach the $100m ARR target by FY21. Even if we were to assume that over the next 5 years, LVT's growth rate linearly scaled down from 167% (FY19) down to 18% in FY24, they would quite easily get to $150m ARR by FY24.
Profitability: Let's assume LVT fails to keep their expenses in check during this stretch and continues to add another $20m of expenses every year. By the end of FY24, their operating expenses would have effectively doubled from FY19. For added conservatism, let's even hypothesise that LVT runs another cash raise for $50m for even greater EPS dilution. By the end of FY24, LVT's PE would sit somewhere between 11-15 and a Price/Sales of 2-3. These numbers highlight to me the potential for 2-4x price growth over the next 5 years.
The full investment thesis is, of course, a lot more complicated. However, I think this summarises the most important considerations well. The question I would recommend all of you to ask regarding LVT is, putting the recent issues aside (check your recency bias), do you believe this is a business that has the potential to reach $100m - $200m ARR in the next 5 years.
My personal answer is a resounding 'yes' because LVT currently possesses an extremely rare combination of strategic advantages:
1) Dominant #1 leader in both the tech and market share
2) situated in a hyper-growth industry
3) demonstrating a rapid growth trajectory
I am by no means suggesting there aren't risks here. However, in my view, this possesses one of the best risk/return potential in all of the ASX.
(20min delay)