Matterport (MTTR 1.84%) and Unity Software (U -2.71%) are both often mentioned in discussions of the so-called "metaverse," which merges the physical and digital worlds with augmented and virtual reality platforms.
Matterport enables companies to create "digital twins" of their houses, offices, and other real-world locations with 360-degree cameras or mobile apps. These twins can then be accessed through web browsers, mobile apps, or VR headsets to experience immersive tours.
Unity powers more than half of the world's mobile, console, and PC games with its cross-platform game development engine. It's also used to build popular VR games like Beat Saber, AR filters on Snap's Snapchat, and various non-gaming applications. It also enables developers to integrate ads, multiplayer features, and payment services into their games.
Yet both stocks have delivered disappointing returns over the past year. Matterport stock hit an all-time high of $33.05 last November, but it now trades at less than $8 per share. Unity closed at an all-time high of $201.12 last November, but it subsequently sank back to the low $90s.
Both stocks lost their luster as rising interest rates and other macro headwinds slammed the market's more speculative growth plays. But is either "metaverse" stock still worth buying today?
Matterport faces a near-term slowdown
Matterport's revenue rose 87% in 2020, but increased just 29% to $111 million in 2021. It expects to generate just $125 million-$135 million in revenue in 2022, which would represent an even slower growth rate of 12%-21%.
That slowdown is shocking, since Matterport claimed it could generate $747 million in annual revenue in 2025 during an investor day presentation just last year. It hasn't abandoned that goal yet, but it would need to grow its annual revenue at a compound annual growth rate (CAGR) of 61% between 2021 and 2025 to reach that target.
Matterport's losses are also widening by both generally accepted accounting principles (GAAP) and non-GAAP measures. Its non-GAAP net loss widened from $11.5 million in 2020 to $46.9 million in 2021, and it expects that loss to more than double again in 2022.
Those dismal numbers suggest that Matterport exaggerated its growth potential prior to merging with a special purpose acquisition company (SPAC) last July. However, it insists that its slowdown is temporary and caused by "supply chain constraints" instead of softer demand for its services. Its subscription gross margins are still expanding, which suggests it's retaining its pricing power in its niche market, and its total number of subscribers nearly doubled year over year to 503,000 in the fourth quarter.
Based on the assumptions that its troubles are transitory, analysts expect Matterport's revenue to rise 17% in 2022 and 53% in 2023 -- but investors should take those long-term expectations with a grain of salt.
Unity maintains a stable long-term outlook
Unity's revenue rose 43% in 2020, then grew 44% to $1.1 billion in 2021. It anticipates another 34%-36% growth in 2022, and expects its average annual revenue growth to stay above 30% "over the long term."
Unity isn't profitable by GAAP measures yet, but its adjusted gross and operating margins are still improving, and it expects to break even on a non-GAAP basis in 2023. It attributes that confident long-term forecast to the growth of the video game market, the increased adoption of AR and VR technologies, and its ongoing expansion into non-gaming markets.
Unity also recently acquired Weta Digital, which created the special effects for The Lord of the Rings and Game of Thrones, to expand into the TV and film industries. The expansion of this ecosystem, along with the stickiness of its cloud-based subscriptions, could transform Unity into a more diversified cloud software company like Adobe or Autodesk over the long term.
Unity still faces plenty of competition from rival game engines, like Epic Games' Unreal Engine and Electronic Arts' Frostbite Engine, but its confident outlook and rising margins indicate it still has plenty of pricing power in that increasingly crowded market. Analysts expect Unity's revenue to rise 35% in 2022 and 29% in 2023.
The valuations and verdict
Unity's business model and growth rates look a lot more appealing than Matterport's, yet its stock is barely more expensive relative to its sales.
Unity trades at 18 times this year's sales, which seems like a reasonable price-to-sales ratio for a company with more than 30% top-line growth. Matterport trades at 16 times this year's sales, which seems expensive for a company that expects 12%-21% revenue growth this year. That valuation might be justified if Matterport's growth accelerates again in 2023, but the macroeconomic headwinds could disrupt that recovery if companies consider the creation of "digital twins" to be an unnecessary expense.
Simply put, Unity is a more promising bet on the metaverse and a better all-around investment for growth-oriented investors. Matterport might eventually win back the bulls if its growth accelerates again, but it's still operating a very speculative business in an untested niche.