It seems as though valuations are resetting across the board. Large technology corporations as well as small-cap companies have been no stranger to the ongoing sell-off in the capital markets. In some ways, it's hard to believe that the days of meme stocks and the subsequent market euphoria were only a year ago. One of the primary contributors to this overzealous investing sentiment was the metaverse. The metaverse is a term used to describe a futuristic alternate reality in which participants can buy and sell goods or interact with one another via virtual avatars. One of the most highly speculated metaverse stocks was spatial-indexing company Matterport (MTTR -1.11%). After reaching all-time highs in November 2021, the stock has cratered more than 80% over the last six months. Let's dig into Matterport's business and assess if now is an ideal time to buy the dip.
What goes up must come down
It can be demoralizing to watch a stock crater in what appears to be a never-ending downward spiral. However, as investors, we must take a step back and really analyze why this selling activity is happening.
Sometimes overselling can be attributed to emotional, or even irrational, investment decisions. On the other hand, stocks are often punished when the company and its management repeatedly fail to meet or exceed their stated goals.
After taking a look at Matterport's latest earnings report, it may be fair to say that the stock price is a reflection of valuation resets and reality catching up with the stock.
Image source: Getty Images.
Reality is setting in
For the three months ended March 31, 2022, Matterport generated $28.5 million in total revenue. While this was only 6% growth from a year ago, it was roughly $1 million above the higher end of the company's prior guidance.
While this level of growth may not excite some investors, it is important to remember where Matterport is focusing its internal investments. The majority of the company's revenue is derived from software subscriptions as well as hardware products. During the first quarter of 2022, Matterport generated $17.1 million of subscription revenue, up 24% year over year. By comparison, hardware product revenue was $7.4 million, which represented a decline from Q1 2021.
At first glance, it may appear alarming that Matterport's hardware revenue base is shrinking. However, the company's income statement provides some valuable detail and may shed light on why management is focusing on software subscriptions. Matterport's hardware products are primarily different types of cameras that the company sells. These products tend to be one-time purchases and carry a low-margin profile. For example, during Q1 2022, Matterport's gross margin on just product revenue was negative 14%. On the other hand, software subscriptions generated gross margins of 69%.
Another encouraging element from the Q1 earnings call was that management reaffirmed its prior guidance of $125 million to $135 million in total revenue for 2022, with software subscriptions forecast to be in the $80 million range.
Despite relatively strong results, Matterport stock has declined by over 80% year to date. To put this into perspective, Matterport's market capitalization was over $5 billion at the end of December 2021. Nearly six months later, its market cap barely eclipses $1 billion. It is fair to say that the company has not been immune to the pronounced selling activity, particularly in technology stocks. Moreover, it's clear that Matterport's valuation got ahead of itself during the time of market euphoria and peak interest in the metaverse. However, with over $600 million in cash and no debt on the balance sheet, coupled with a fast-growing and high-margin software business, Matterport's current valuation may appear attractive for some investors.
Buy, sell, or hold?
Over the last couple of months, Matterport stock has been bought and sold by a number of high-profile investors. Namely, ARK Invest CEO Cathie Wood purchased over 400,000 shares in May, bringing her total holdings to nearly 1.1 million shares when the stock initially dropped below $5. However, nearly one month later the technology investor has essentially liquidated her entire position.
Although seeing Wood exit a position shortly after a large buy may be concerning, it is important to remember that she manages institutional money and has a fiduciary responsibility to her investors. Perhaps more concerning is what insiders are doing with the stock. According to recently filed Form 4s on the Matterport website, executives at the company have been selling the stock.
For example, Matterport Chief Financial Officer JD Fay sold nearly 300,000 shares in early June. Additionally, the company's chief technology officer sold 60,000 shares around the same time. On top of that, Jason Krikorian, one of the company's board members, sold over 500,000 shares in late May.
Generally speaking, it is not an encouraging sign when insiders are selling their stock. Although Matterport's business is trending in the right direction, it is difficult to imagine how the company will compete with larger tech companies pursuing the metaverse. While the stock could be attractive at this valuation, the most prudent move for investors is likely to dollar-cost average in existing positions while also keeping a close assessment on future earnings.
