Matterport: Invest In Digital Twins, VR, And The Metaverse

Summary

• Matterport is a play on a relatively new market that can be called many things including 3D capture, spatial data, reality capture or digital twins.
• The stock has recently been flying high since the end of October over hype that Matterport will be a key player helping Facebook build the Metaverse.
• Third quarter earnings only produced 10% year-over-year revenue growth, which is not much for a growth company.
• The thesis for this company is simple. Investors that put money into Matterport believe that the company is in the very early stages of a massive growth opportunity.
• Matterport is a buy for aggressive growth investors willing to speculate but risk-averse investors should avoid this stock in the current environment.

da-kuk/E+ via Getty Images

Matterport (NASDAQ: NASDAQ:MTTR) only recently came public as a SPAC in late July of 2021, as a play on a relatively new market that is called many things including 3D capture, spatial data, reality capture or digital twins. When the company first came on the market, not many people were aware of what the company does, so it took a few months before the stock has started gaining traction in the market.

Data by YCharts

When most investors hear that Matterport is a digital twin company, they yawn, probably because digital twin is a relatively new term and not everyone knows what it means yet. However, when most investors hear that Matterport technology can be used with AR/VR technology, they get more interested and finally when investors hear that Matterport technology can be used to build the Metaverse, then investors get really excited and start buying the shares hand over fist, with many not even aware of what they are actually buying.

Since Facebook changed its name to Meta (NASDAQ: FB) and a few people did a little research and discovered that Facebook and Matterport have been in a partnership since late June, both analysts and investors have connected the dots and concluded that Matterport could be important in building Zuckerberg's Metaverse. That realization has sent the stock price up +44% since the end of October.

Data by YCharts

Reasons To Be Cautious

Among the reasons to be really cautious about buying into the hype of Matterport is that the company came public through the non-traditional route of a SPAC acquisition. Rightly or wrongly, SPACs have a poor reputation and are notorious for having poor performance on the stock market, likely for the reason that most SPAC companies are early-stage speculative companies and with the possibility of the Federal Reserve getting aggressive, many investors are not in a speculative stock buying mood.

Matterport should be considered a very speculative stock because the stock is mostly firing higher on the possibility of what the company could be in a world in which the Metaverse is very important but people should realize that the Metaverse itself is also a speculative idea in the here and now.

Currently, Matterport does not really have the fundamentals to get growth investors really excited today. In the third quarter, the company only produced 10% revenue growth year-over-year and that is growing off of a very low base. The rise in the stock during November can mostly be attributed to investors speculating that growth will accelerate in 2022 because of all the potential in the new partnerships and exciting announcements that the company is making, which is expected to start bearing fruit next year. However, the company still must execute its vision and that vision is likely to play out over multiple years and not just one year.

Reasons to Be Excited

Source: Matterport Q3 2021 Earnings Presentation

The thesis for this company is simple. Investors that put money into Matterport believe that the company is in the very early stages of a massive growth opportunity where there is very little competition at the moment.

What The Company Does

In an article written by Matt Bell, Co-Founder of Matterport, he explains that every object in sophisticated 3D video games, 3D training simulations, and other interactive 3D content are currently made by hand in a very expensive process using 3D modeling software, which he describes as being analogous to painting in a 3D world, while describing what Matterport does as the equivalent of taking a picture in a 3D world. When you really think about it, what is easier, taking hours to paint a scene or simply taking a snapshot of the same scene? That is the analogous difference between using solutions from Unity Software (NASDAQ: U) to "paint" 3D representations of a scene and using the Matterport app named Cortex to take a 3D digital photo of the same scene.

In more technical terms, Cortex, when used with a special camera or a smartphone, has the ability to capture a dimensionally accurate photorealistic digital twin of a physical space and turn it into a virtual 3D model. The 3D model has a wide variety of different applications for businesses and currently, Matterport is addressing those applications in 6 different verticals.

Source: Matterport Q3 2021 Earnings Presentation

Among the first and the biggest application that Matterport has found for its spatial data is in real estate, which made up about 2/3 of the company's revenue in Q3. When Matterport first came public in July, they claimed that only .1% of existing buildings in the world have been digitized, which is the equivalent of $20 billion in monetizable spaces that have gone undigitized.

Matterport is right now in the process of signing up as many of the major residential brokerages and commercial real estate brokerages in the world as they can, as well as all of the major internet real estate portals like Redfin (NASDAQ: RDFN). These major real estate businesses are a great aid in getting more buildings scanned and digitized around the world. In return, both residential and commercial real estate businesses receive great benefits.

The benefit for residential real estate is they will be able to digitally market properties more effectively by having the ability to provide virtual 3D tours for home buyers searching for properties online or for potential buyers that do not have the time or desire to visit the property in person. The day might eventually come, if VR proliferates, where real estate is predominantly purchased virtually. What Matterport does for commercial real estate is allow enterprise, large companies and facilities managers to more easily manage large portfolios of properties by allowing such things as remote access, training and inspection of facilities from anywhere in the world.

There are many more applications, however, for Matterport's spatial data besides simply helping real estate companies. Insurance is currently one of Matterport's fastest-growing new verticals. I can see a day where insurance companies mandate a property to be digitally scanned in order for the property to be insured. Now, why would an insurance company want to collect spatial 3D data of a property?

Well, insurance companies already see the potential use for Matterport's technology is such areas as claims processing, claims assessment and management. Recently, Matterport partnered up with Verisk (NASDAQ: VRSK), which has enabled them to speed up the insurance claims process by eliminating the need for claims professionals to manually sketch loss sites. Insurance companies are already requesting a number of value-added add-ons from Matterport to help the whole insurance industry.

For insurance, building owners can quickly document a home, assets, warranties, upgrades, personal property and even keep active records of how the property, its contents and condition have changed over the years. They can also easily capture a Matterport model on a loss to quickly document things such as subrogation, insurance fraud, sub-bids, approval questions and resolution disputes.

Source: Matterport CEO Raymond Pittman - Matterport Q3 2021 Earnings Call

Besides helping real estate and insurance companies, Matterport has discovered there is an unmet need for its services in the public sector and recently added its newest vertical in late August by forming a partnership with In-Q-Tel and AWS GovCloud (NASDAQ: AMZN) with the goal of digitizing all government facilities and infrastructure. The market opportunity in digitizing the US Federal government is estimated to be +$260 billion in value, according to a study done by the Obama administration in 2017. This estimate does not even include the opportunities Matterport has within local and state governments.

As an example of what spatial data could do for local governments, just imagine if local police departments and fire departments are in a situation where they need to enter a public building in an emergency and they now have access to detailed plans of the building layout, ingress points, egress points and knowledge where all the critical infrastructure is located. Then imagine that this capability could be accessed by decision-makers from a remote location, long before a decision is made to enter the building.

I have only lightly mentioned just a few verticals and use cases of spatial data. In the grand scheme of things, Matterport has barely started exploring all the potential applications of its technology. I am quite certain, though, that once Matterport crosses a certain threshold of spatial data collection, then they or other companies will create all types of use cases that could eventually become new profitable business lines and it is likely that no one has even thought of many of these potential new business applications yet.

I consider Matterport as a company that has very high optionality. This means that the company has an almost unlimited number of opportunities for building business models around the spatial data being collected. This is important for investors, as the stock market often gives above average valuations to companies perceived to have high optionality because of the possibility of upside from businesses that no one has factored in yet.

The most famous example of optionality is Amazon, where the company was continually called overvalued when only the original Amazon marketplace existed. Investors were completely unaware, at the time, that Amazon would eventually produce AWS or other businesses like logistics due to the optionality built into Amazon's business. Matterport has strong possibilities of doing something similar to Amazon, in that Matterport's eventual best and most profitable businesses surrounding its technology and collection of spatial data might not even exist yet. There is very large potential value in the spatial data that Matterport is collecting and it is no accident that Facebook chose to partner with them.

Matterport, Facebook, Meta, and the Metaverse

In late June, Facebook partnered with Matterport to help push forward Habitat, Facebook AI Research's simulation platform that is designed to help robots better understand and safely interact with the physical world. This linked article explains how Matterport will contribute spatial data to the Habitat-Matterport 3D Research Dataset (HM3D) for the purposes of "teaching robots and virtual AI assistants to understand and interact with the complexities of the physical world".

Since the beginning of November, numerous analysts have speculated that the Facebook and Matterport partnership could evolve into much more and that Matterport could be a huge winner from Facebook evolving into Meta, especially because of the already existing partnership. It is easy to come to that conclusion, since all of the digital twins created on Matterport's platform are VR-ready. This means that all of the historic buildings, museums, theaters, hotels, etc. that are already within the company's database have the possibility of being used in concepts such as the Metaverse or in other VR-based applications.

Matterport Q3 2021 Earnings

Source: Matterport Q3 2021 Earnings Presentation

The first thing to understand about Matterport's Q3 results is that most of the metrics that growth investors use to assess a growth company today, are for Matterport rather lackluster, so the company currently appears to be choosing to emphasize the things that they think will likely to happen in the future to produce upside.

One other thing to be aware of is that the company is in the midst of a transitional phase of moving away from the traditional one-time purchase sales model to a subscription-based model. When other companies have done that in the past, it tended to make YoY numbers either look bland or even downright ugly but companies that eventually succeeded in making that transition have often exhibited tremendous upside. An example of a company that successfully made the transition is Adobe. Investors in Matterport are speculating on a similar Adobe-type success story.

Matterport has several sources of revenue consisting of product, services, license and most importantly subscription revenue. Subscriptions are core to the company's growth strategy, as subscriptions often result in more stable recurring revenues with a higher gross margin. This is why the company made sure to include a slide in its investor presentation above, showing that they expect the subscription revenue mix to rise to 86% by CY25, resulting in overall gross margins rising to 73% from 56%. So Matterport is very much a margin expansion story over the next 3 years.

As for revenue growth, it is currently lackluster, which has already caused many growth investors that use stock screeners to overlook this stock. Third quarter revenue came in at $27.7 million, only up 10% from Q3 last year and missing estimates by $1.49 million. Needless to say, there is an expectation among bullish investors that revenue growth will accelerate in the future.

License revenue was $0.1 million compared to $3 million last year. License revenue can be very lumpy from quarter-to-quarter. Services revenue for the third quarter was $3.3 million, up 41% year-on-year. Matterport offers a variety of services, including in-app purchases and capture services. Product revenue was $8.6 million, up 4% year-on-year. Matterport sells a number of products on its website here, that makes up the product revenue number. I believe the Matterport Pro 2, is the company's feature product.

Source: Matterport Q3 2021 Earnings Presentation

Subscription revenue grew 36% year-over-year to $15.7 million. This is the most important growth that investors should follow, as subscription revenue is expected to be the overwhelmingly largest portion of the business several years from now and it is also the highest margin.

ARR or annual recurring revenue grew to $62.7 million at quarter end from an ARR of $61.1 million at the end of the second quarter. ARR is an important metric because it is revenue that is expected to repeat. ARR is often considered an indication of a subscription company's health and its future growth. This company's growth in ARR seems lackluster QoQ but then again, this metric is expected to pick up steam over the course of 2022.

Source: Matterport Q3 2021 Earnings Presentation

Matterport uses a freemium model. In Q3, total subscribers rose 116% to 439,000 from year-ago period. Free subscribers grew 136% to 385,000, while paid subscribers rose 35% to 53,000 from the year-ago period. The company also increased its Spaces Under Management by 62% to 6.2 million spaces.

In the above slide presentation, the company also notes the impact of launching the Cortex app on iOS and now Android. Matterport considers the Android app launch very important as Android has around 75% market share worldwide. So, the launch of Android is one of the things expected to accelerate growth for Matterport next year.

Our recent launch of Matterport for Android is very timely, and dramatically expands our reach for digitizing spaces using just the phone in your pocket, while giving us an important advantage to our global growth plans for Asia Pacific, Europe, the Middle East and Africa.

Source: Matterport Q3 2021 Earnings Announcement

Net dollar expansion rate was 114% in Q3, which is above the historical growth rate of 110% but is well off of the record net dollar expansion rate of 132% in Q2. Net dollar expansion rate is calculated by dividing the revenue for a given period from customers who remained customers as of the last day of the given period (the "current" period) by the revenue from the same customers for the same period measured one year prior (the "base" period).

Source: Matterport Q3 2021 Earnings Presentation

I am not a big fan of the use of the Net dollar expansion rate, as it is a metric that is often confused with the Dollar Based Net Retention Rate or DBNER. The Net dollar expansion rate does not factor in any churn into the equation, while DBNER does factor in churn. Most of the time, a company will highlight the Net dollar expansion rate, when the DBNER does not put the company in a good light. I do think in the future that Matterport can improve its net dollar expansion rate and possibly highlight DBNER metrics in the future, as the company creates more add-on products and gains more enterprise customers. Currently, the company still has relatively low penetration among enterprise customers.

Source: Matterport Q3 2021 Earnings Presentation

The following numbers are non-GAAP but I have included the GAAP to non-GAAP reconciliation in the above graphic for those that prefer GAAP numbers. Matterport total non-GAAP gross margin for the third quarter was 55%. Gross margin for both subscription and services increased, while there was minimal margin contribution from license revenue in the third quarter.

Source: Matterport Q3 2021 Earnings Presentation

Subscription gross margin was 77%, up 240 basis points from a year ago, which was above company expectations. The subscription gross margin is the more important margins to pay attention to, since subscriptions should be 86% of the business in approximately 3 years.

Source: Matterport Q3 2021 Earnings Presentation

The following operating numbers are non-GAAP. R&D expenses were $7.8 million, up from $3.7 million in the prior year period. The company explained during the earnings call that the growth in R&D spending is planned and is primarily a result of hiring more people in order to increase product development capabilities and throughput.

SG&A expenses were $21 million as compared to $9.5 million a year ago. The rise in S&M spend is an effort to create more growth. G&A spend rose as a result of becoming a public company.

Operating loss was $13.6 million in the third quarter, compared to an operating profit of $1.9 million in the year ago period.

Source: Matterport Q3 2021 Earnings Presentation

Non-GAAP net loss was $14 million and diluted non-GAAP loss per share was $0.06 for the quarter beating estimates by $0.01

GAAP net loss was $168 million and diluted GAAP loss per share was $0.86 for the quarter missing estimates by $0.79.

Guidance

Matterport lowered its outlook for full year 2021 total revenue by forecasting revenues in the range of $107 million to $110 million, which is lower than previous guidance of $120 million to $126 million for total revenue in 2021. The 2021 full year outlook is up from 2020 revenue of $86 million, and up from 2019 revenue of $46 million.

The following is analyst estimates for revenues for 2021 and 2022.

Source: Seeking Alpha

The above estimates mean that the most pessimistic of the analysts expects Matterport to only grow revenues 22% year-over-year in 2022 and the most optimistic of analysts expects Matterport to grow 60% year-over-year in 2022. CFO James Fay mentioned during the earnings call that he expects to grow annual total revenue in the 50% range, as the economy begins normalizing post COVID-19.

Matterport is narrowing the EPS range to a $0.21 to $0.25 non-GAAP loss per share for the full year from the previous range of $0.17 to $0.25. There is a onetime litigation expense that is expected to be incurred in the fourth quarter, which was not included in last quarter's guidance.

One thing to be aware of, which was mentioned in the guidance, is that the company has been finding it difficult to ramp up to meet the demand due to a tight labor market.

While we have been successful hiring key talent during the quarter, it has been difficult to hire all the personnel we need as quickly as desired to meet our goals. We ended the quarter with 401 employees bringing on 75 new colleagues during the quarter.

Source: Matterport CFO James Fay - Matterport Q3 2021 Earnings Call

Balance Sheet

Analyst Price Targets

Source: Yahoo Finance

The above is based on 5 Wall Street analysts offering 12-month price targets for Matterport in the last 3 months. The average price target is $30.20 with a high forecast of $38.00 and a low forecast of $25.00. The average price target represents a slight decrease from the last price of $31.18.

The $38 price target comes from Daniel Ives, who believes that Matterport is an "under the radar" growth opportunity that is in its early growth stages. The company is considered one of Wedbush's favorite ideas heading into 2022.

According to GuruFocus, Matterport has a PS ratio of 221.13 TTM.

Conclusion

Matterport is a very early-stage speculative company. Investors that invest in the company at this point in time need to understand that they are not investing in the company based on current fundamentals but based on what the company can do +3 years down the road.

Matterport is a buy but only for aggressive investors willing to speculate on new cutting-edge concepts like digital twins, VR and the Metaverse. Matterport could very well trade more on the hype that Facebook, now Meta, stirs up about the Metaverse or another way to say it is that Matterport is currently a "story stock" that could easily defy everyone's valuation models. Risk-averse investors need to avoid this stock, especially in the current uncertain environment

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in MTTR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.