Fast-growing Canadian technology company Lightspeed is pushing back after a short seller alleged the company has misled investors about its financial health, causing a $2 billion plunge in the company's value.
On Wednesday, Spruce Point Management, an American short-selling investment firm with a history of targeting Canadian companies, put out a lengthy report on Montreal-based Lightspeed Inc., alleging the company has covered up "massive inflation" of how many customers it has, how much money it makes from them, and how much growth potential it has.
Lightspeed is a payment processing company that helps small businesses sell things online and in person. It has been compared to Ottawa-based Shopify, which is currently the most valuable company in Canada.
Lightspeed "baits investors with its massive potential in its payments solution, but we believe it has not been transparent about competitive pressures and material margin decline," the report says, among other allegations.
WATCH | Spruce Point lays out its case against Lightspeed:
"We believe Lightspeed is crowding into Shopify's space, and will be forced to compete head-to-head with it, and new entrants such as Amazon. We believe Lightspeed will lose the battle."
The report prompted shares in Lightspeed to plummet by more than 11 per cent on Wednesday, closing at $126 a share on the Toronto Stock Exchange.
Prior to the short seller's report, the company's share price has been a rocket ship during the pandemic.
After bottoming out at around $12 a share early in the pandemic, Lightspeed's value has marched steadily higher for more than a year to nearly 10 times what it was worth in its IPO barely two years ago.
Lightspeed has seen growing demand for its services as more retailers start to sell things online during the pandemic, but the company has also grown because of an aggressive strategy of acquiring smaller rivals, something Spruce Point says is also dubious.
Spruce Point says the company is massively overvalued, and is poised to plummet to as low as $22 a share.
Short sellers such as Spruce Point make money when stocks in the companies they are shorting go down. They do this by borrowing existing shares, selling them, and then buying them back later to replace what they borrowed at what they hope will be a lower price later on.
WATCH | How short selling works:
How short selling works
3 years agoDuration 0:46An animated explanation of how people make money from stocks losing value 0:46Lightspeed isn't the first Canadian company that Spruce Point has targeted. Previously, the short seller has taken aim at Dollarama, Canadian Tire and waste management firm GFL, with varying degrees of success.
Lightspeed said nothing to address the report for most of Wednesday, but after markets closed the company put out a short, terse statement denying the allegations.
"The report contains numerous important inaccuracies and mischaracterizations which Lightspeed believes are misleading and clearly intended to benefit Spruce Point, which itself has disclosed that it stands to profit in the event that the stock price of Lightspeed declines," the company said.
Spruce Point has not declared how much of the company's shares it is shorting, but data compiled by Bloomberg shows that about 2.5 million shares in the company are being shorted overall. That's about two per cent of the company.
"Lightspeed is confident in its governance, financial reporting and business practices. Lightspeed has consistently delivered revenue growth since its initial listing on the Toronto Stock Exchange in March 2019."
Analysts who cover the company are mostly positive about its prospects, but the short report caused some jitters. Of the 17 analysts on Bloomberg who cover the company, 14 have it as a buy recommendation. One says hold, and only two say sell.
One of those, Howard Leung of Veritas, had a sell recommendation on the company even before Spruce Point levelled its accusations against the company.
"Overall, while we have issues with management's [accounting] we continue to believe the business can still exceed short-term guidance given reopening trends and the company's growing scale," he said in a note to clients Thursday.
"Investor doubts persist around [Lightspeed] because management is not providing enough high-quality disclosure."
Leung has a price target of $96 on the shares, which is about $30 below where they were on Wednesday. "The industry is too competitive to justify [Lightspeed's] current valuation," he said.
Investors don't seem to know who to believe on Thursday, as Lightspeed shares jumped up when the stock market opened, but late in the trading day the shares were changing hands at about $120 each, bringing the two day sell-off to 15 per cent and wiping out $2 billion off the value of the company.
For its part, Spruce Point called Lightspeed's defence "laughable."
Lightspeed "provided a total dodge and deflect response and effectively told all its investors to go buzz off with that boilerplate non-response PR late yesterday," Spruce Point said in a tweet on Thursday morning.
