Matterport (MTTR) markets a spatial computing platform that allows users to turn physical spaces into dimensionally accurate and photorealistic digital twins. This provides customers with the data insights needed to manage physical spaces. Shortly after its public offering, Matterport signed strategic partnerships with Facebook (META -0.28%) and Amazon (AMZN 0.58%). These alliances have excited retail investors and Wall Street analysts alike, as it is becoming clear that Matterport's technology will play a focal point in big tech's metaverse aspirations.

The company listed on the Nasdaq earlier this year after completing a SPAC merger with Gores Holdings VI. Matterport's year-to-date stock price return is 126%, handily topping the S&P 500 and its return of 26%. Let's dive into Matterport and if these returns were warranted.

A person is interacting with an object in virtual reality.

Image source: Getty Images

How Matterport makes money

Similar to how Google, an Alphabet business, transformed physical road maps into data-rich, digital maps, and location services, Matterport digitizes buildings and creates an environment to better understand the full potential of each space that is captured. As the company transforms buildings into data worldwide, Matterport is quickly becoming the de facto business intelligence engine for the built world of physical spaces.

The company has historically relied heavily on product revenue (i.e., hardware). However, since its IPO, Matterport has been investing aggressively in the software side of its business. As a result, software revenue has grown 54% year over year through the first nine months of 2021. Given that software is a higher margin opportunity for Matterport, the company should be able to increase reinvestment back into the business as software comprises an even greater portion of revenue.

That revenue shift is happening quite quickly: As of the third quarter of 2021, software subscriptions make up the largest contribution of total revenue (53%) compared to hardware (31%). For this reason, I believe that investors will begin to see more dramatic growth in the total revenue base compared to the current total revenue growth of 10% sequentially from the second quarter of 2021 to Q3 2021. However, the payoff of those increased software subscription revenue is going to take time to materialize, and it is important for investors to realize that there is a long road ahead.

From physical spaces to the metaverse

In October 2021, Facebook publicly announced that it would rebrand as Meta Platforms. As part of this announcement, Facebook CEO Mark Zuckerberg described the next chapter of the Internet as a medium that will be more immersive whereby users are interacting with experiences, not just looking at them online. This concept is referred to as the metaverse.

To help achieve this objective, Facebook announced a collaboration with Matterport through which it will release a collection of 1,000 Matterport digital twins comprised of residential, commercial, and civic spaces generated from real-world environments. This library will play a major role in the advancement of embodied AI research, which seeks to help robots understand and interact with the complexities of the physical world. 

In addition to its partnership with Facebook, Matterport recently announced the availability of its platform in Amazon's Amazon Web Services (AWS) Marketplace. Matterport is working with AWS to deliver enterprise solutions that leverage Matterport's digital twins. As part of this partnership, AWS launched a new service called "IoT TwinMaker," with the goal to make it easier for developers to create digital twins for the Internet of Things (IoT), smart buildings, etc. With Matterport as its launch partner, AWS IoT TwinMaker allows customers to contextualize digital twin data, gather insights and analytics, as well as virtually access real-time and time-series replicas of their spaces.

Valuation concerns

When considering whether or not to buy a stock, it is always important to keep valuation in mind. With a market capitalization of over $6 billion as of the time of this writing, the company is currently trading at a rich valuation considering its trailing 12 month revenue of about $108 million. Matterport's Q3 revenue only grew 10% quarter over quarter, a sequential rate of growth that's below what I'd expect from such a highly valued stock.

Valuation multiples are experiencing compression as investors rerate risk, and we are seeing this dynamic in even the highest quality companies. For this reason, smaller revenue and unprofitable businesses such as Matterport are at risk of getting overextended from a valuation perspective. As multiples compress in larger technology companies, it is certainly possible that Matterport will experience a pullback, allowing investors an opportunity to invest at a more reasonable price.

Now what?

It is possible that excitement around the metaverse and its implications on society have gotten ahead of itself, resulting in frothy valuations for companies such as Matterport. I think that a lot of future value from the Facebook and Amazon partnerships, as well as the idea of the metaverse, have already been priced into the stock.

As an investor, I am intrigued by the metaverse, and I am also impressed with Matterport's progress as a public company in such a short time. However, I believe that the stock is due for a pullback based on its current financial profile and growth rates, as well as broader market conditions as they relate to potential interest rate hikes and inflation concerns. My outlook for Matterport is that the company will be a long-term winner and an important component in powering the metaverse, meaning there's probably time to buy the stock, ideally, after a dip in price.