Canadian tech firm Lightspeed lost $2B in value after short-seller attack

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.

“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,” the report said. “We believe Lightspeed will lose the battle.”

WATCH | Spruce Point lays out its case against Lightspeed:

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:

An animated explanation of how people make money from stocks losing value 0:46

Lightspeed 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 refuting 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.”

At least in the short term, investors seem to be convinced by the company’s defence as the sell-off in Lightspeed shares seems to have halted early Thursday, with shares up about four per cent to just over $130 in early trading. But Wednesday’s sell-off still knocked $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.

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