Matterport (NASDAQ:GHVI) is a technology company going public through a special purpose acquisition corporation (SPAC) called Gores Holding VI. Since the merger was announced in February, share prices of the SPAC have gone on a wild ride, soaring over 100% to $20 a share before settling down to around $14.75, which is where the stock sits today.

Matterport calls itself a "spatial data company" that is trying to help digitize the physical world through its "digital twin" strategy. Is the stock a buy? Let's take a look.

A hand tracing a streak of white light in a circle.

Image source: Getty Images.

What is Matterport?

Matterport helps companies and individuals create virtual versions of 3D spaces. Called "digital twins," these interactive representations of the real world help people analyze properties without actually having to physically be in them. To create a digital twin, customers use cameras (including just a smartphone) to capture their space.

Then, they upload the data to Matterport, which processes it and creates a digital twin that the customer can interact with and analyze. The value proposition is that users of Matterport can create realistic versions of the physical world that anyone else can access and analyze virtually, saving everyone time and money.

The company operates a freemium subscription model. It has a free tier where anyone can access the Matterport technology, but in order to publish files and share with others, customers need to pay the company a monthly subscription. This can range from $10 a month for one user to up to $309 a month for businesses with 20 users and 100 spaces.

Right now subscription revenue makes up around half of Matterport's top line, with the other half coming from selling cameras and licensing its technology. By 2025, management is projecting 86% of its revenue to come from subscriptions, so this is the part of the business that investors should focus on the most.

Customers of Matterport are wide-ranging and include residential and commercial real estate, the architecture, engineering, and construction industry (AEC), and even insurance companies. It works with large companies like Marriott International (NASDAQ:MAR) and has partnerships with industry peers like Autodesk (NASDAQ:ADSK) with its BIM 360 workflow product.

It is going after a gigantic opportunity

As you may have inferred from the product's wide-ranging applications, Matterport management thinks digital twins have a huge addressable market to go after. In its SPAC presentation, the company thinks there is a $240 billion total addressable market (TAM) for digital twins, with 20 billion spaces around the globe.

For reference, in April, Matterport only just passed 5 million spaces on its platform. At 200 million spaces (which is only 1% market penetration), the company thinks it can hit over $2.4 billion in annual recurring revenue (ARR). Last quarter, ARR was only $55.2 million, which indicates that Matterport is just cracking the surface from a customer adoption standpoint.

These numbers look enticing, but investors should remember that these are just projections, and will take strong execution in order to fulfill. It can be dangerous to be caught up in buying a stock just because the TAM is large, as it has no indications of whether the business can truly serve the needs of all these potential customers. However, in this case, I think investors can give these SPAC projections some merit, as it is pretty clear the market opportunity for Matterport is enormous if you believe it can be applied to every building in the world.

Matterport also has competitors within the digital twins market, including real estate platform Zillow (NASDAQ:ZG) (NASDAQ:Z) and a bunch of smaller start-ups. There are tons of other larger software companies, like its current partner Autodesk, that could enter this market as well, especially if it ends up as lucrative as Matterport management claims. An onslaught of competition doesn't mean Matterport can't grow (the market is large enough for multiple players), but it will require strong execution from management and adds a layer of risk to this investment.

So is the stock a buy?

In its SPAC presentation in February, Matterport outlined its long-term revenue projections. It expects to hit $123 million in sales this year and thinks it can get to $747.3 million in annual revenue by 2025, most of which will come from software subscriptions. With a current share price of $14.75, investors are buying into Matterport's business at an implied enterprise value (market cap minus cash) of $3.33 billion post-merger.

This gives the stock a forward price-to-sales (P/S) ratio of 27 based on 2021 revenue estimates and 4.46 based on 2025 revenue estimates. Even with high gross margins and reliable subscription revenue, these are expensive multiples and imply that Matterport needs to grow at a rapid pace for the stock to perform well over the long term.

With these valuation metrics taken into consideration, even though Matterport looks like a promising business, the stock does not look like a buy right now. But if you are bullish on the company's prospects, it could be a perfect stock for the "buy-in-thirds" strategy. This means taking a very small position now, with plans to buy more if the stock's valuation gets cheaper in the coming years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.