Matterport (MTTR -16.93%) posted its first-quarter earnings report on May 10. The 3D spatial mapping company's revenue rose 6% year over year to $28.5 million, which beat analysts' expectations by $1 million. Its adjusted net loss widened from $2.2 million to $27.9 million, or $0.10 per share, but it still beat analysts' estimates by four cents.

Matterport's stock rallied after the report, but it remains nearly 70% below its first trade of $14.42 a share, which followed its merger with a special purpose acquisition company (SPAC) last July. The stock has also declined almost 90% after hitting an all-time high last November.

Is Matterport a deep value play at these levels, or is it another broken growth stock that's headed much lower?

A person studies a virtual model of a home on a tablet.

Image source: Getty Images.

What does Matterport do?

Matterport's software enables individuals and businesses to scan locations to create "digital twins" of physical spaces like homes and offices with the company's own first-party cameras, various third-party cameras, or its mobile app.

These twins are uploaded to Matterport's cloud-based servers, where they can be accessed via subscriptions and integrated into websites and apps. Its free subscribers can only access a single digital twin, while its paid subscribers pay between $10 to $689 each month to access five to 300 models.

During the first quarter, Matterport generated 74% of its revenue from its paid subscriptions, licenses, and services. The remaining 26% came from its products business, which mainly sells its first-party Pro 2 3D cameras.

How fast is Matterport growing?

Matterport's revenue increased 87% to $85.9 million in 2020, but grew just 29% to $111.2 million in 2021. It mainly blamed that slowdown on global supply chain constraints, which throttled its production of Pro 2 cameras.

That slowdown persisted in the first quarter: Its product revenue fell 10% year over year and partly offset its 24% growth in subscription revenue.

Matterport expects to generate $125 million-$135 million in revenue this year, which would only represent 12%-21% growth from 2021. That slowdown will make it very difficult to achieve its long-term goal of hitting $747 million in annual revenue in 2025, which will require a whopping compound annual growth rate (CAGR) of 61% over the next four years.

Mind the gap between its free and paid subscribers

Matterport's total spaces under management increased 49% year over year to 7.3 million in the first quarter. Its total number of subscribers grew 70% to 562,000. Those growth rates seem impressive, but only 58,000 of those subscribers were on paid plans.

Period

Q1 2021

Q1 2022

Growth (YOY)

Free Subscribers

282,000

504,000

79%

Paid Subscribers

49,000

58,000

18%

Total Subscribers

331,000

562,000

70%

Data source: Matterport. YOY = Year over year.

Most of Matterport's growth was driven by its free subscribers, which contribute nothing to its top line while racking up higher cloud hosting costs. Its existing subscribers are still spending more money on the platform, as seen in its dollar expansion rate of 107% during the quarter, but that growth can't offset the dilution of its revenue per subscriber from its free users.

As a result, the cost of revenue for its subscription business climbed 62% to $5.3 million and outpaced its growth in paid subscribers. The cost of revenue at its product business also surged 70% to $8.4 million as it grappled with the ongoing supply chain issues at its hardware business.

Declining margins and a murky future

Those headwinds caused Matterport's gross margin to plunge from 62% to 42% between the first quarters of 2021 and 2022. Its operating loss also widened from $2.4 million to $84.9 million as it expanded its ecosystem, ramped up its marketing, and courted more users with free subscriptions.

Matterport believes it can stabilize its business by gradually converting its free users to paid ones, but that's a very speculative strategy. Matterport already faces plenty of competition from larger competitors like Zillow Group (ZG 0.02%) (Z 0.49%), which operates its own 3D spatial scanning platform, as well as smaller start-ups like EyeSpy360, Cupix, and Easypano.

Matterport's first-party camera business could also fade away as higher-end 3D smartphone cameras hit the market. It's expanding its mobile app to deal with that shift, but Apple (AAPL 0.42%) and Alphabet's (GOOG 1.15%) (GOOGL 1.01%) Google have already been rolling out more 3D-scanning and augmented reality features for their mobile operating systems. That native support could make it easier for other iOS and Android developers to launch their own 3D spatial scanning apps.

It's still too speculative and expensive

Matterport's technology is interesting, but its slowing growth, widening losses, high ratio of free to paid users, and narrow moat are all bright red flags. It also still trades at ten times this year's sales, while other fallen growth stocks have already seen their price-to-sales ratios drop to single-digit levels.

Therefore, I believe Matterport's post-earnings pop will be short-lived. Its business is still struggling, and its stock could easily be cut in half (or more) in this unforgiving market.