The craze for special purpose acquisition companies -- aka SPACs -- has cooled off, and in many cases, shareholders have been left holding the bag. Of the 41 special purpose acquisition companies that have completed merger transactions since the start of 2020, only three are within 5% of their highs.
There are, however, a few amazing companies among those former SPACs, and their investors could see strong results over the next five years. Because of their growth potential and the SPAC sell-off, Latch (LTCH) and Matterport (MTTR 0.86%) are my top stocks under $20 to buy today.
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The case for Latch
Latch makes technology that helps apartment building managers control access to their buildings -- ensuring that tenants and others who are supposed to be there can easily enter while keeping those who shouldn't be inside on the outside. It's a market that until recently hadn't been penetrated much by technology.
The company sells smart locks, but the key to its business is its software. Landlords can manage all of their buildings from one platform and tenants can let anyone into their homes remotely from anywhere. So far, it has proved to be highly popular with property developers: 1 in 10 new apartment buildings under construction in the U.S. are being built with Latch installed.
With Latch's software, landlords can do such things as restricting the access of specific tenants or employees to specific times, or seeing when tenants enter or exit their apartments. So if, for example, a building manager sees a tenant's access code being used to enter their building at midnight while that tenant's on vacation out of town, they could immediately act on this potential red flag. Benefits like that have resulted in Latch not losing a single customer since 2017, and allowed it to achieve a net revenue retention rate of 154%.
The company's bookings grew 102% year over year in the second quarter to $93 million, and its revenues rose 227% to $9 million. Bookings -- money that customers have promised to pay within the next two years -- are a key metric for Latch. The company expects its growth to continue steadily, and sees the total addressable market for its offerings exceeding $90 billion annually. The company forecasts full-year 2021 revenue growth of between 110% and 133%, which works out to a range between $38 million and $42 million. Latch is guiding for total bookings to grow to between $325 million and $340 million, representing growth of 97% to 105%.
Profitability -- or rather, the lack of it -- is the main risk here. Latch reported net losses of $40 million for the first half of 2021, and negative free cash flow of $37 million. Latch is very early in its journey, so it has a lot to prove in terms of product adoption and international expansion. If it is successful in this -- with revenue and bookings continuing to grow rapidly -- the company could be an amazing investment.
The case for Matterport
Matterport digitizes real-world spaces with 3-D capture technology, creating a digital twin for any space a customer might want mapped. Then, those digital maps can be analyzed, allowing the owners and users to optimize the building or space. This technology has seen broad adoption already -- Redfin (RDFN -2.81%), Airbnb (ABNB 0.10%), and Hyatt (H -0.38%) are all Matterport customers.
Matterport sees the total addressable market for its service digitizing buildings and other spaces reaching $1.2 trillion in annual recurring revenue. Given that as of Q2, it had just $61 million in ARR, its growth opportunities are vast. The company has 5.6 million spaces under management (i.e., spaces that it has digitized) -- representing less than 0.1% of its addressable market of 20 billion spaces that could be digitized.
In Q2, the company reported a net dollar expansion rate of 132% -- meaning that its customers spent on average 32% more with Matterport than they had in the prior-year quarter -- so while the company has low penetration, its customers love the product.
It's also quickly attracting new customers: Subscribers jumped by more than 150% year over year to more than 404,000, and the company's spaces under management increased by 75%. And revenue increased 10% year over year to $30 million in Q2.
Like Latch, though, Matterport is net income and free cash flow negative. It lost over $9 million in the first six months of 2021 while booking a negative $6.2 million free cash flow. On the bright side, both of these metrics were improvements from a year ago -- its net loss shrank by 23% and its negative free cash flow shrank by 12%.
It's trading at 42 times trailing 12-month sales, which is a high valuation for any company. But like Latch, Matterport is young and has a lot to prove. That it's gaining customers rapidly is a great sign. If that continues, Matterport's shareholders could see amazing returns over the next 10 years.
