Matterport (NASDAQ:MTTR), a developer of 3D spatial mapping tools, went public by merging with a special purpose acquisition company (SPAC) in late July. Its stock opened at $14.42 per share on the first day, and more than doubled over the following four months to about $32 today.

Is Matterport's stock still worth buying after that massive run? Let's discuss three reasons to buy this hot stock -- and one reason to sell it -- to decide.

1. A first-mover's advantage in a niche space

Matterport originally sold 360-degree cameras that allowed companies to create virtual tours of homes, offices, and other locations. It also developed a cloud-based service that could convert 2D images into 3D spaces. Matterport subsequently launched an iOS and Android app that enabled mobile devices to easily scan physical spaces with their 3D-sensing cameras to create 3D "digital twin" dollhouses.

A "digital twin" of a home created by Matterport's software.

Image source: Matterport.

That process eliminated the need for high-end 360-degree cameras, and its digital twins now have plenty of potential applications in a wide range of industries. For example, realtors can offer virtual tours of houses, retailers can develop virtual shopping experiences, and insurers can ask their customers to document their losses with 3D scans instead of 2D photos.

After a space is scanned, its digital twin is hosted on Matterport's cloud-based servers. These spaces can't be accessed offline, so its customers need to subscribe to its free or paid tiers for access-- which enables them to take virtual tours or integrate the digital twins into their own websites.

Matterport's free tier enables a single user to access a single space, while its paid tiers enable more users to access more spaces. Matterport enjoys a first-mover's advantage in this niche market, and it could generate explosive growth if more companies decide to convert real places into cloud-based 3D models.

2. A long runway for growth

Matterport generates most of its revenue from its cloud-based subscriptions. Its revenue rose 87% to $85.9 million in 2020, and grew 35% year over year to $84.1 million in the first nine months of 2021. It ended the third quarter with 439,000 subscribers, up 116% from a year ago. Within that total, its number of paid subscribers rose 35% to 54,000. Its "freemium flywheel" already serves 13% of the Fortune 1000, and its most notable customers include Redfin, Airbnb, Hyatt, Chick-fil-A, and H&M.

Matterport's total number of managed spaces increased 62% year over year to 6.2 million in the third quarter, which the company claims is about 100 times more than the rest of the entire market combined. Analysts expect its revenue to rise 27% to $109 million this year.

That growth rate is decent, but Matterport believes it can generate $747 million in annual revenue in 2025 -- which would represent a whopping compound annual growth rate (CAGR) of 54% between 2020 and 2025. It expects that growth to be driven by a massive expansion of the digital twin market.

3. Its gross margins are expanding

Matterport is still deeply unprofitable, but its gross margin rose 260 basis points year over year to 57.9% in the first nine months of 2021. Over the long term, it expects its gross margin to rise to 73% by 2025.

Those expanding margins reflect the conversion of Matterport's free users into paid subscribers. It also indicates its market dominance gives it plenty of pricing power, and that its gross margins will continue to expand as economies of scale kick in.

If that trend continues, I believe it might gradually rein in its operating expenses (which consumed 120% of its revenue in the first nine months of 2021) and narrow its losses. However, tougher competition in Matterport's nascent market could still force it to invest more cash into its R&D and marketing efforts -- and keep it unprofitable for many more years.

The one reason to sell Matterport: its valuation

Matterport is currently valued at approximately 70 times this year's sales. It's also trading at nearly eleven times its rosy revenue target for 2025. There seems to be too much growth baked into Matterport's stock at these levels, and it could struggle to hit its long-term targets if more competitors enter the 3D scanning market.

Most of Matterport's competitors are tiny start-ups right now, but it could be easy for Apple (NASDAQ:AAPL) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google to roll out similar features for their iOS and Android devices as part of their expansions into the AR market. Apple and Google could also both back up those scans to their own cloud services.

I'd be more impressed with Matterport if it were on track to grow its revenue by over 50% this year. But that's clearly not the case, so I think investors should take its long-term forecasts with a grain of salt.

Do Matterport's strengths outweigh its weaknesses?

Matterport's technology is innovative, but its frothy price-to-sales ratio, widening losses, and heavy dependence on long-term forecasts all leave it heavily exposed to rising inflation and higher interest rates. Investors can consider buying Matterport's stock if a market crash cuts it in half, but there aren't any good reasons to chase this overheated stock right now.

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.