There are many software-as-a-service (SaaS) stocks that have been popular in 2020 and 2021, but two companies have stayed relatively under the radar during 2021. Even though both companies operate in massive industries, they have gone unnoticed by many investors.
Since September, however, both companies have found a spotlight, rising close to all-time highs. Procore Technologies (PCOR +3.93%) and Matterport (MTTR +0.00%) have risen within 5% of their all-time highs over the past month, showing that investors are waking up to how much growth potential both companies have. But which one is a better buy today?
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Procore: Bringing software to a stone-age industry
Procore is bringing software tools to an industry that desperately needs them: construction management. Construction is one of the least digitized industries. And with construction managers planning, contracting out work, and operating a custom large-scale project, it seems like construction is one of the industries that actually needs sophisticated software the most. In 2018, the industry spent more than $250 billion on rework because of poor data and miscommunication.
Procore's technology enables effective connection and communication among everyone involved in a construction project, mitigating the negative effects of legacy operations. By enabling communication and providing a centralized platform for all parties involved in a project, Procore has created something innovative. Customers seem to think the same thing: The company has over 11,000 customers and just 6% customer churn; 43% of its customers use four out of Procore's 13 products, and over 800 customers spend over $100,000 with Procore.
In the second quarter of 2021, the company reported 27% year-over-year revenue growth to $122.8 million and gross margins of 79%. The company lost almost $150 million in the quarter, driven by over 300% and 200% increases in general & administrative and research and development (R&D) expenses, respectively.
Here's what CEO Tooey Courtemanche said about these expenses: "We're in the early days of transforming this industry, and do not intend to slow down our investments in existing and new products, nor deepening the robustness of our platform as we look to further drive innovation." On the bright side, the company has generated $15 million in free cash flow so far in 2021, although that cash generation is nowhere near enough to subsidize the company's losses.
Procore's growth runway is extreme: It believes that it has captured just 2% of its total potential customer base. Procore could use this long growth runway to become profitable by leveraging its strong margins to bring more cash to the bottom line as it grows revenue. Even as the market leader, the company has incredible room to expand. But trading at 23 times sales, investors seem to be dismissing the important fact that Procore lost more money than it brought in during the second quarter, and although the company has a large market ahead, it is not growing at rates that suggest it will become profitable anytime soon.
Matterport: After the construction
Once a building is built, it is Matterport's time to shine. Matterport allows customers to map real-world spaces by creating a digital map called a "digital twin." The digital twins can then be analyzed, allowing the owners to search for ways to optimize their space. This technology has seen adoption by big-name customers already: Redfin (RDFN +0.00%), Airbnb (ABNB +2.90%), and Hyatt Hotels (H +4.36%) are all Matterport customers. Airbnb, for example, could use Matterport to create a 3-D rendering to show off a host's space to prospective buyers on its website or app -- which gives a better idea of what the space is actually like than pictures alone.
Matterport's 5.6 million spaces under management actually represent just 0.3% of its total addressable market, indicating that this company is just getting started. Matterport has already begun to realize this market opportunity with 158% customer growth in the second quarter of 2021, surpassing 400,000. Revenue grew 10% from Q2 2021 to $30 million. And its subscription revenue, which made up 50% of total revenue, grew 53%.
The company lost $6 million in the second quarter, which made up just 21% of revenue, and it has burned nearly $6.3 million in free cash flow as well. While the company (like Procore) has astounding growth potential, its financial position is not the strongest. That position is much stronger than Procore's, but it is not yet something to show off.
Matterport stands taller
The clear winner to me in this fight is Matterport. While both companies' futures look bright, it has everlasting opportunity because of its multi-market potential. Procore's market is only construction right now, but Matterport has customers in all fields, including hospitality, retail, and insurance, demonstrating its incredible optionality.
Its financial position is also much better. It isn't profitable, but considering the similar growth rates and the companies' focus on growth rather than profitability, its net loss is much more bearable than Procore's. While both companies have seemingly unstoppable growth, Matterport looks to be operating with more structure and discipline, which is why I believe it is a better buy today.
