Although the metaverse is still in early development, enthusiasts seem to agree that gaming, crypto, and virtual reality will all play a central role. As a result, many technology stocks that overlap with these themes have experienced more pronounced buying and selling over the last several months.
Matterport (MTTR 0.86%) went public through a special purpose acquisition company (SPAC) in July 2021. Shortly after its public offering, the company announced strategic partnerships with FAANG members Meta Platforms and Amazon. Matterport stock rocketed to $37.60 per share in November 2021 but has been on a downward spiral ever since.
Following the broader sell-off in tech stocks, Matterport now trades at $8 per share at the time of this writing. Even though the company has an ambitious roadmap ahead, its fourth-quarter results included some encouraging metrics that signal now may be an interesting time to buy.
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An improving financial profile
For the year ended Dec. 31, 2021, Matterport generated $111 million in total revenue, up 29% year over year. While analyzing the income statement, investors may be concerned about the company's increasing expense profile. Matterport ratcheted up its expenses following its initial public offering (IPO). Research and development costs increased over 200% year over year from $17.7 million to $55.4 million, while selling, general, and administrative costs increased 265% from $41.8 million to $152.4 million.
Although this increase in costs may appear alarming, it's important to keep in mind that Matterport strengthened its executive team during 2021, hiring several new team members across different areas of the business. Moreover, the increased investment in research and development could be a lucrative catalyst for the business down the road.
Following the IPO, Matterport has centered its investments on new software features and capabilities that can be integrated into its 3D cameras (hardware). In 2021, Matterport generated $61.3 million in software revenue, up 47% year over year. On the other hand, product revenue (hardware) was slightly lower year over year, reporting $32.5 million in 2021 compared to $33.1 million in the year prior.
The company is focused on its software revenue because it is a recurring revenue stream, whereas the hardware is typically a one-time purchase. According to its Q4 investor presentation, Matterport generates 78% gross margins from its software subscription business and believes that overall gross margin can expand from 57% today to 73% by 2025 as the company increases its revenue mix to be geared toward subscription offerings. If the company can continue generating high revenue growth in its subscription business, Matterport should be able to trim its losses and form a viable path to profitability.
Unlocked opportunity in the metaverse
The term metaverse has certainly risen in popularity over the last few months. Social networking platform Facebook's namesake parent announced a rebrand to Meta Platforms in October 2021, as the company declared its intent to be a pioneer in this new realm. Although Matterport's primary end-market is the built world, such as commercial real estate or retail property, its underlying technology could be a massive driver for metaverse development.
Wedbush Securities analyst Daniel Ives expressed positive sentiment regarding Matterport's alliance with Meta Platforms, stating, "we believe this was the first step toward a much broader Facebook and Matterport relationship as Zuckerberg & Co. head down the metaverse path."
Investors should be encouraged by this remark because Ives implies that the current role Matterport is playing in Meta's ecosystem should expand over time. There could be unlocked growth potential in the years ahead.
Keep an eye on valuation
As always, it is very important to keep a keen eye on valuation. The metaverse is an interesting concept that could redefine the Internet. Meanwhile, it could be an overly ambitious project that does not materialize. The metaverse represents a lucrative, albeit tangential, growth avenue as the company is focused on penetrating the property market, not necessarily building out features of the metaverse.
Matterport could command a premium valuation should the company increase its recurring software business over time. The company currently trades at nine times the price-to-sales ratio, compared to nearly 60 times in December 2021. While the company has invested heavily in marketing and product development, investors are already seeing impressive growth in subscriptions which could propel margin expansion.
Given the company's current revenue trajectory, product development, and partnerships with big tech, Matterport certainly represents an interesting stock to buy as it hovers around 52-week lows.
