Long LTCH – This Isn't Jamie Siminoff's First Rodeo
Dear OpTrackers,
Today’s idea is Latch (LTCH US), a $300mm market cap company listed in the US and trades $3-$4mm/day. This is truly a “bet the jockey” idea. The reported financials we have today are ugly, but as outlined below we believe there are reasons to think there is a path to value creation here.
I would also note upfront that I have had this idea in my pipeline of things to write about for a few weeks now and given the stock has run I will not be tracking it for performance purposes (for better or for worse). However, it’s such a good illustration of the OpTrack investment approach that I think it’s worth covering even just as a case study and there may still be room to run. If you enjoy it, please subscribe and feel free to share.
For The Uninitiated
While there are dozens of tools available to enable the qualitative and quantitative analysis of THE BUSINESS of a potential investment, at OpTrack.io I believe there is an unmet need for analysis of THE PEOPLE that drive the outcomes of these businesses. I hope you find it helpful. If you do, please subscribe and share it far and wide. It would mean the world to me.
Business History and Overview
LTCH is a “smart home” company that sells hardware and software to home owners and commercial/residential building managers. They have their own hardware (mainly or mostly locks) and their software platform integrates with their own hardware as well as third-party vendors. For example, Google Nest thermostats can be plugged into the LatchOS, which helps building managers operate and monitor their buildings.
Based on a cursory review of the financials the company is selling their hardware at a small loss on the gross margin level and all the profitability in the business comes from the $7-$12/mo/apartment they charge building operators for the software. That software is ~90% gross margin.
Up until recently the company has been a complete financial dumpster fire. While it has grown revenue nicely, the zero gross margin hardware business (which is multiples bigger than the software segment today) has been a massive cash burner and the stock traded from the $10 SPAC deal price to $0.50 just a few months ago.
The People Angle
This story starts to get interesting and first got on my radar two months ago in mid-May when Latch announced it would acquire Honest Day’s Work (“HDW”). The reason this is interesting is that HDW is run by Jamie Siminoff, who founded video doorbell company Ring and eventually sold it to Amazon for $1bn. Simultaneous with the acquisition, it was announced that if the deal closed (which it since has), Jamie would take over as CEO of LTCH and he’d bring 30 other people with him – so this was a large and expensive acquihire.
The total consideration for the deal was 29mm shares of LTCH and a $22mm promissory note. The shares at the time were trading for $0.70 – $0.80 and – very importantly – Jamie’s portion of the 29mm shares are locked up for 5 years unless the stock achieves a 60-day VWAP of $2, $3, $4, and $5. 25% of his shares will be released from the lock up at each hurdle. So while he was given a large percentage of the company, he will only see that value if he gets the share price up A LOT or if he incurs 5 years worth of opportunity cost of his time.
This is a really interesting recipe. A guy who can point to a prior $1bn exit (Ring) to a serious strategic acquirer (Amazon) agreed to sell his current company to a (at the time) ~$100mm public company for (mostly) locked-up equity and will become the new CEO of the combined entity.
The Unknowns
The reason I am writing this up as more of a lesson than a “live” idea is that the stock has run massively from when this change was announced – ~$0.70 to $2.30.
Furthermore, there are a lot of unknowns and things not to like, so missing the first move in a situation like this makes a huge difference in the risk/reward in my view. Some cautious things to keep in mind:
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In addition to his shares, Jamie owns a large portion of the $22mm of unsecured promisory notes that were issues to HDW shareholders that comes with 10% PIK interest – this is very expensive paper and means Jamie is not 100% aligned with shareholders (though obviously he stands to make way more money from his 29mm shares than this promissory note)
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I don’t actually know how “good” of a company Ring was. Because it was not a public company, I don’t know if he actually built a healthy business or if he was simply able to take advantage of the frothy 2018 market to sell Amazon a dog of a business. And there is a HUGE lift in front of him at Latch to take it from its current state to anything that looks healthy
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LTCH laid off >50% of its employees throughout the course of 2022 and just a week ago announced it was laying off >60% of the remaining employees. It is yet to be seen how these changes will effect the P&L and operations of the business – even if the stock ultimately ends higher, this could be a rocky turnaround on the way
Big picture, this is a great example of how “human” investing can be. Great people can not only drive exceptional outcomes in business performance but can drive exceptional changes in the story or narrative surrounding a company that can catalyze dramatic re-ratings in a short period of time.
If you’re interested in hearing about more situations like this in the future make sure to subscribe below!
Disclaimer: Please remember this post should not be taken as investing advice and please consult a licensed financial advisor before making any investment decisions. The OpTrack team did its best to present everything above in a factually accurate way, but there is always room for error in biographical data on executives and market data. There may be mistakes of omission or commission in the above – if you find one – please reach out to OpTrack@OpTrack.io so that we can correct it.
