Special purpose acquisition companies (SPACs) have taken over the market. These shell companies, essentially just a pile of cash, merge with private businesses to quickly take them public without going through the more arduous IPO process. One recent SPAC, Gores Holding VI (GHVI), is going to merge with Matterport, a spatial data company looking to help bring about more digital transformation in the real estate and construction industries.
Is Matterport a stock for the long haul? Let's investigate.
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What is Matterport
Matterport was founded in 2011. The company's goal is to allow users to create a digital twin of any physical space, be it a commercial building, factory, or residential home. A digital twin is a virtual representation of an object or space that can be updated in real-time. This service lets people or companies to virtually monitor and show their assets without having to physically travel to them, saving time and money in the process. Users scan a 3D space with cameras (Matterport also offers special equipment for high-quality scans), and Matterport's technology processes the data and creates a 3D representation of it.
Customers of Matterport include Redfin, Compass, AT&T, and Verizon. These companies all have millions of square feet to manage, and Matterport helps them analyze their properties virtually.
The company operates a freemium business model, allowing anyone to download its mobile app and make scans, but if customers want to publish to websites or use other tools, they pay a monthly subscription that can range from $10 to $209, depending on how many users and tools they want. In the first quarter, Matterport reported $26.9 million in sales, up 108% year over year, and it hit annual recurring revenue (ARR) of $55.2 million for its subscription business. It is not yet GAAP profitable, but gross margin was 62%, indicating the business has the potential to become quite profitable once it scales. Matterport was in 4.9 million spaces at the end of the first quarter, growing 88% from the previous year.
Tons of opportunities for growth
Matterport management identifies a lot of growth opportunities, but the main one is to expand its presence globally. There are an estimated four billion buildings and 20 billion spaces (an internal Matterport metric, it is unclear how they define it) worldwide, leaving a huge market for Matterport to grow its digital twin solution.
It is aggressively trying to grow its consumer business. Last year, Matterport's iPhone application launched, which allows any Apple user to create 3D representations of spaces they own without custom cameras. An Android app was launched this March, which now gives the majority of smartphone users around the world access to Matterport's technology. This expansion into smartphones has been a boon to its subscriber growth. In the first quarter, the company had 331,000 subscribers, up 531% year over year.
Lastly, Matterport is rolling out on-demand capture services to cities around the world. This service allows customers to pay Matterport to have technicians come to their space and produce high-quality scans. Overall, Matterport is trying to get its spatial data technology into as many people's hands as possible with the theory that eventually, many of them will become paying subscribers.
The valuation is steep
Since the merger has not gone through yet, investors who want to own Matterport need to buy shares in Gores Holding VI, the SPAC partner in the deal. Shares of the SPAC trade at $14.56 as of this writing. Using Matterport's merger materials, this means investors are buying shares in the company at an estimated $3.3 billion enterprise value (market capitalization minus cash).
This year, Matterport is expecting to generate $123 million in revenue, which puts its forward price-to-sales ratio (P/S) at about 27. This is very expensive compared to practically every other stock on the market. In fact, according to its merger estimates, Matterport is only expecting to generate $73 million in operating income by 2025, giving it a five-year forward price-to-operating-income ratio of 45. Again, this is extremely expensive.
Matterport does have high gross margins, and it may be the leader in its category with a long runway to grow, but it would still be smart for investors to exhibit patience with this stock right now, even if they are bullish on the company's prospects going forward.
