Fast-growing Canadian tech company Lightspeed is backing down after a short seller claims the company misled investors about its financial health, causing the company’s value to fall by $ 2 billion.
Spruce Point Management, a U.S. short-selling investment firm with a habit of targeting Canadian firms, released a lengthy report on Montreal-based Lightspeed Inc. on Wednesday, alleging the firm covered up a “Massive inflation” in the number of clients it has. , how much money it makes and what is its growth potential.
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 “is baiting investors with its enormous potential in its payment solution, but we believe it has not been transparent about competitive pressures and sagging margins,” the report says, among other allegations.
“We believe Lightspeed is cramming into the Shopify space and will be forced to compete with it and new entrants such as Amazon,” the report said. “We believe Lightspeed will lose the battle.”
WATCH | Spruce Point sets out its arguments against Lightspeed:
The report prompted Lightspeed shares to fall more than 11% on Wednesday, closing at $ 126 a share on the Toronto Stock Exchange.
Prior to the short seller’s report, the company’s stock price was rocket during the pandemic. After hitting a low of around $ 12 a share at the start of the pandemic, Lightspeed’s value has risen steadily for more than a year to nearly 10 times what it was worth when it went public. is barely two years old.
Lightspeed has seen growing demand for its services as more retailers start selling things online during the pandemic, but the company has also grown due to an aggressive strategy of acquiring smaller rivals. , which Spruce Point also considers questionable.
Spruce Point claims the company is massively overvalued and is on the verge of falling to $ 22 a share.
Short sellers like Spruce Point make money when the stocks of the companies they sell short go down. They do this by borrowing existing stocks, selling them, and then buying them back later to replace what they borrowed at what they hope will be priced lower later.
WATCH | How short selling works:
Lightspeed is not the first Canadian company targeted by Spruce Point. Previously, the short seller targeted Dollarama, Canadian Tire and waste management company GFL, with varying degrees of success.
Lightspeed said nothing to respond to the report for most of Wednesday, but after markets closed, the company issued a short and terse statement refuting the allegations.
“The report contains many inaccuracies and misinterpretations which Lightspeed believes are misleading and clearly intended to benefit Spruce Point, which itself has revealed that it would be profitable if Lightspeed’s stock price fell.” , the company said.
Spruce Point has not reported how much of the company’s shares it is shorting, but data compiled by Bloomberg shows that around 2.5 million shares of the company are sold short overall. This represents about two percent of the business.
“Lightspeed is confident in its governance, financial reporting and business practices. Lightspeed has seen consistent revenue growth since its initial listing on the Toronto Stock Exchange in March 2019. ”
At least in the near term, investors seem convinced in the company’s defense, as the sale of Lightspeed shares appears to have stopped early on Thursday, with shares rising about 4% to just over $ 130 at the start. session. But Wednesday’s sale caused the company’s value to drop another $ 2 billion.
For its part, Spruce Point called Lightspeed’s defense “laughable.”
Lightspeed “provided a total dodge and deflection response and effectively told all of its investors to go away with that boilerplate no-response PR last night,” Spruce Point said in a tweet Thursday morning.