SPAC stocks became a market phenomenon in 2020 and 2021 when more than 800 of these special purpose acquisition companies went public on the hopes of an eventual merger with another company. Those 800-plus new listings were more SPACs than in the nearly 20 previous years combined.
Spacial data specialist Matterport (MTTR 0.86%) was formed out of this surging group and got its public start through a merger with the SPAC Gores Holdings VI in July 2021. Stock for the merged company soared as high as $37.60 a share in mid-November, well above the $10 per share price the SPAC was at its creation.
Unfortunately, this technology stock with metaverse potential has fallen in recent months and now trades around $7.70 a share, well below its SPAC price. That's a 79% decline from its 52-week high.
Image source: Getty Images.
Growth stocks tend to have some price volatility early on as investors get a better feel for their true potential, so one shouldn't assume that Matterport is "doomed" as an investment. But there are signs that it could take time for investors to see highs once again.
What does Matterport do?
Matterport refers to itself as a spatial data company; users employ its software to create identical digital replicas of actual physical spaces. Matterport's customers can use these digital models in various ways, from helping to make engineering decisions to making e-commerce stores with storefronts identical to a physical store. Real estate technology company Redfin uses Matterport to create 3D walkthroughs of homes for sale that allow potential remote homebuyers to tour a 3D replica of a house with all the features and blemishes that the original has. The technology also has potential uses in the metaverse, inserting digital replicas of the physical world into the digital world.
Along with the software, the company also sells camera hardware to capture spaces, though users can also capture them using their smartphones. The 3D models sell on a subscription model, with prices increasing with the more spaces you capture. Matterport is a pioneer of capturing spatial data; it claims to have 6.7 million spaces under management, more than 100 times its nearest competitor.
Looking at the valuation in hindsight
The stock came public over the summer but peaked at the end of 2021; hype picked up as big tech companies like Meta Platforms pivoted to the metaverse. Matterport became a hot stock, hitting a forward price-to-sales ratio that approached 40 at one point. Over the past several months, the dramatic sell-off across most growth and tech names has brought Matterport's valuation down to a fraction of what it was, as seen in the chart.
MTTR PS Ratio (Forward) data by YCharts
Things always seem more evident in hindsight, but Matterport's fundamentals do provide clues that it could struggle to approach these valuations again.
For starters, the business has a mix of both hardware and software revenue. It sells camera equipment (often as a one-time purchase for users) and generates subscription revenue from the 3D models. The hardware sales remain a significant contributor to the business, generating 39% of revenue in 2021 Q4. The software carries 78% gross profit margins, which are much higher than the hardware that's often sold at thin margins as a "mousetrap" to get users on the platform.
Matterport reminds me of streaming company Roku, which sells streaming hardware while also generating ad revenue on its platform. Platform revenue has slowly become the majority of Roku's business, but the stock's forward P/S ratio is just 5, despite platform revenue now making up 81% of the business. I would argue that Roku is a far more established company than Matterport, yet the stock remains three times as expensive from a P/S ratio standpoint.
The path forward
Looking forward, Matterport grew subscription revenue 47% in 2021, which is solid but hardly a hypergrowth pace compared to some Software-as-a-Service (SaaS) stocks in the tech sector. Meanwhile, in management's guidance for 2022, it said it was expecting full-year subscription revenue to grow 31% to 34%, a notable slowdown from the growth seen in 2021.
Management aims to drive gross profit margins from 54% to 73% by 2025 as the subscription business grows and further outnumbers hardware sales. Still, seeing such a slowdown in expected growth is not ideal, considering the company is not yet profitable. Management is guiding non-GAAP earnings-per-share for 2022 to be -$0.47 to -$0.52 per share.
So is Matterport a buy?
It's hard to make a clear argument for Matterport's stock while it's trading at a forward P/S of 15; there are arguably superior companies with similar business models (like Roku) trading at a fraction of that valuation. Then you look forward and see that Matterport's primary focus -- its subscription software revenue -- is expected to noticeably slow down next year. The metaverse seems like a legitimate use case, but Matterport needs to prove it in the numbers.
Matterport probably had no business trading at the valuations it did in late 2021, and it wasn't helped by going public via SPAC merger when there was a frenzy for SPAC stocks in the market. Nobody knows what a stock will do tomorrow or a week from now. But looking at the fundamentals, it seems like investors will be waiting a while for Matterport to approach its highs again.
