So far in 2021, 222 special purpose acquisition companies (SPACs) have combined with their merger targets -- the highest annual figure for such deals ever. However, because of the lack of regulation around these mergers (among other reasons), many of those companies have gotten the cold shoulder from investors, and their stocks haven't fared well. The average SPAC stock has fallen by nearly 10% since the date its merger closed.
Many SPACs have acquired low-quality companies, but there were a few diamonds among them. In particular, I think that Latch (LTCH +0.00%) and Matterport (MTTR +0.00%) could soar in value over the next decade.
Image source: Getty Images.
1. Latch: Reimagining apartment safety
Latch's innovative software has the potential to become the operating system of choice for apartment buildings. On the surface, Latch may look like a hardware manufacturer -- it produces keyless locks for large apartment complexes. Although its true potential resides on the software side. LatchOS -- its software -- gives apartment managers all-encompassing views of their complexes, allowing them to remotely ensure that everything is secure.
The platform offers features such as Latch Manager -- which allows managers to monitor tenant activity. With Latch Manager, a manager can easily see which locks are unlocked, when they were unlocked, and by what tenant. This allows managers to spot potential problems. LatchOS also allows building tenants and managers to remotely grant access to guests, laborers, and other workers who might need temporary access to specific parts of a building.
No rivals make software like this -- let alone combine it with smart lock hardware as Latch has. This gives the fast-growing company a first-mover advantage in its space, and the high switching costs inherent to changing systems down the road could allow it to maintain the lead it's obtaining today.
There are also strong incentives for building managers to adopt this software. According to the company, by using Latch, building managers can increase their revenues by an average of $200 to $500 per apartment per year, and decrease their annual expenses by $100 to $300 per apartment.
These advantages have led to the company's tech being rapidly adopted -- it's being built into nearly 30% of apartment buildings that are under construction today. Moreover, the company says it has experienced zero customer churn since it launched in 2017.
While all of this may sound amazing, those results haven't translated into profitability yet. In the first three quarters of 2021, the company lost more than $112 million -- a figure equal to over 400% of its revenue. However, almost all of the company's revenue currently comes from its hardware -- which it sells at a loss.
The growth story for Latch can be found on the software side of the business. Like another company that derives its profits from its software and platform -- Roku (ROKU +0.06%) -- Latch hopes to do the same. Its clientele pays for its software via monthly subscriptions per apartment, so as more building managers use Latch over longer periods, the company's software revenue -- which has gross margins of 90% -- will grow rapidly.
Latch is still in the early stages of its growth, but its first-mover advantage seems to be incredibly effective and the high switching costs of its hardware could allow it to maintain the lead it is creating today. This is why I think the company could become wildly successful over the next 10 years.
2. Matterport: Building the metaverse
If investors want to invest in the metaverse, Matterport should be high on the watch list. The company allows businesses to capture 3D images of their spaces and upload them to the cloud, creating digital copies of those spaces that can be used for anything a business may need. Whether a property owner wants to analyze a space to determine its optimal usage, create a unique e-commerce experience where consumers can virtually walk through a store, or bring a duplicate of a real physical location into the metaverse, Matterport has the tools businesses need.
While many competitors offer similar tools for real estate, Matterport is the main player in this space when it comes to service for all industries. Matterport has over 6.2 million spaces under its management with customers ranging from the real estate industry to construction.
The company has over 439,000 users, but just 54,000 of them are paying subscribers. This low conversion rate is why the company only had $28 million in revenue in Q3. But, its revenue coming from subscriptions increased 36% year over year. Considering that the majority of its revenue comes from subscriptions -- the other major revenue stream is the sales of its 3D imaging hardware -- it is a good sign to see this strong growth.
The company did grow its paying user base by 35% year over year in Q3, and it has the potential to extend that pattern by capitalizing on a massive and expanding market. Management sees a $240 billion addressable opportunity ahead of Matterport today. If the company can continue converting free users into paying subscribers as the shift to a digital world continues, I think Matterport could be much bigger in 10 years.
Both of these stocks are trading at relatively high multiples. Latch currently trades at 31 times sales, and Matterport trades at 66 times 2020 revenue. Both of these valuations are extremely high, and here's the bottom line as to how to think about these valuations: Neither company is valued based on its current fundamentals.
The two companies have financial worries -- mainly unprofitability -- but the growth avenues for each business are massive. Therefore, these companies are currently valued on the growth prospects for themselves. I think that they could potentially succeed in their respective markets, but the valuation can justifiably scare off some investors who might not be able to hold these businesses for the next decade.
