How Latch unlocks a neglected market
Apartment management and security can seem like a relatively bland industry – which is probably why few investors pay attention to an ambitious company currently shaking up this market. Latch (NASDAQ: LTCH) sells both software and hardware to help building managers let the right people in and keep the bad ones out. With exceptional products that create lasting partnerships with great apartment makers, Latch has a huge opportunity to disrupt this giant market over the next 20 years.
Break into industry
Latch’s product, LatchOS, reinvents the way apartment managers manage their buildings. By combining hardware and software, Latch enables apartment managers to operate all of their buildings from a single platform.
Latch allows tenants to let in who they need, anytime, anywhere, even if they’re not at home. Need to let your dog walker in while you’re at work? Latch’s mobile app can make it happen. Latch also integrates with smart home utilities, so tenants can adjust lights, thermostats, and other smart home devices from their phones, even if those gadgets are from different brands.
With Latch, landlords can give and restrict access to specific tenants at any time, and they can also see when tenants are entering or leaving their apartments. If landlords see a tenant’s access code being used to enter their building at midnight while that tenant is on vacation, they can act quickly on this potential red flag.
These handy features likely explain why Latch hasn’t lost any customers since 2017. It might also explain Latch’s 154% net dollar revenue retention rate, meaning every customer Latch had last year is spending now. on average 54% more. with Latch today.
Big customers hold the keys
Latch has amassed an impressive list of clients from major apartment builders and real estate companies like Tishman Speyer, Brookfield and Avalon Bay, whose scale has allowed Latch’s revenue and reservations figures to blow the doors of quarterly estimates. . In its most recent quarter, total bookings reached $ 95.8 million, an increase of 102%, and total revenue increased 227% to $ 9 million.
Reservations represent the amount of money that Latch customers have promised to pay, roughly over the next 2 years. When a large apartment complex is under construction, the locks and software for those locks are probably the last things to add. Yet Latch receives these promises to use Latch from apartment builders before they begin construction. Latch records the bookings made when it signs a contract with the builders, but it does not recognize these revenues until the apartments are fully built. As long as these buildings are actually built, Latch’s reservations could generate revenue equal to more than 10 times this quarter.
Latch integrates quickly into new apartments. In its most recent quarter, Latch’s cumulative reserved residential units grew 108% to over 451,000. While its current market penetration is low, it is quickly on its way to (literally) becoming a household name. For the full year, Latch expects bookings to grow from 97% to 105%, showing no signs of stopping its formidable growth.
I’m just starting to open the door
Latch’s current market opportunity is huge, and it can expand even further over time. Currently, it has a total addressable market of $ 54 billion that can continue to grow as the company pursues opportunities such as international markets or trade offices. It also has the option of extending the services of its LatchOS offering, as it recently did by deploying delivery management, which allows tenants to secure their packages safely until they arrive at their homes.
Despite all of this growth, Latch is still a very young company, and although it has its foot in the door of this incredible market opportunity, there is a lot of competition in this industry. While no other company offers the wide array of quality offerings that Latch does, Amazon’s Ring Doorbell is a primary competitor. However, other smart home device vendors might see Latch’s success and decide to enter this industry and exit Latch from the market.
And while Latch ensures the safety and security of tenants, it can do so to the detriment of their privacy. Renters may not be comfortable with their landlords getting a lot of information about their personal lives, including when they come home and when they leave. Latch promises, at least, to only collect this information from common areas such as front doors, never individual tenant units. And it allows tenants to see when an owner or staff member of their building has been in their apartment while they are away.
Latch is also losing a lot of money on the locks it sells – currently its only hardware product and its main lead product. However, Latch’s software subscription fees from the sale of LatchOS software have gross margins of 90%. Latch believes the subscription fees will eventually exceed the low margins of its locks, as its customers will continue to pay the monthly fee, which will position the company better in the future. Until Q4 2021, all of Latch’s business had a negative gross margin, but he expects this to tend towards positive gross margins as he continues to build customer loyalty.
For Latch to be successful as a business, it will need to continue to grow and succeed by expanding its relationships with its customers and landing in new apartment complexes. Its products have put Latch in the door, and continuous additions and improvements could make its products even more attractive to customers. As it increases its revenues, reservations and margins, Latch has the potential to unlock this vast market and feel at home in it.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.