Unity Software (U -1.40%) and Matterport (MTTR) aren't usually considered competitors. Unity's eponymous game engine powers more than half of the world's mobile, console, and PC games. It also provides additional advertising, multiplayer, and analytics tools. Matterport develops 3D spatial scanning software which creates "digital twins" of physical locations and stores them on a cloud-based platform. It also sells 3D cameras, which enable customers to scan their own locations.

But over the past two years, Unity expanded into Matterport's backyard with its own 3D scanning and digital twin tools. Could that strategy, which is part of its broader diversification away from the gaming market, crush Matterport and make Unity a more promising long-term investment?

A person's face being scanned digitally.

Image source: Getty Images.

Both companies face near-term headwinds

Unity and Matterport both struggled this year as rising interest rates punished higher-growth companies that failed to hit home runs.

Unity's stock declined more than 60% this year as the growth of its advertising business -- a key component of the Operate Solutions segment which generated 64% of its revenue last year -- stalled out. That slowdown, which partly offset the robust growth of its Create Solutions (gaming engine) business, was likely caused by incompatibilities between its advertising algorithms and Apple's (AAPL -0.60%) privacy-oriented iOS update.

Unity is rebuilding its advertising algorithm and trying to accelerate that recovery by buying the ad-tech company ironSource (IS). Still, it only expects its revenue to rise 18% to 23% this year. That would represent a significant slowdown from its 44% revenue growth in 2021.

Matterport's stock plunged more than 70% as supply chain disruptions throttled the growth of its products business -- which mainly sells 3D cameras and generated 29% of its revenues last year. Its software platform continued to gain new subscribers, but only 62,000 of its 616,000 subscribers were on paid plans (which allow the cloud-based storage of more than one digital twin) at the end of the second quarter of 2022.

Matterport expects its supply chain disruptions to continue and for its revenue to rise 19% to 24% for the full year. That would represent a slowdown from its 29% growth in 2021, even after factoring in its recent acquisition of the real estate marketing company VHT Studios.

Matterport claims to be the "clear market leader" in the niche market for digital twins, but Unity could gradually catch up by bundling its digital twin services with its other tools. Unity also provides digital twin services for a broader range of architecture, manufacturing, automotive, aerospace, and retail customers -- while Matterport remains tightly tethered to the real estate sector.

Nevertheless, both companies could still profit from the secular expansion of the digital twin market, which could grow at a compound annual growth rate (CAGR) of 39% from 2022 to 2030, according to Grand View Research. Therefore, there could be enough room for both companies to expand their digital twin platforms without trampling each other.

One company has a clearer path toward profitability

Unity and Matterport are both unprofitable by generally accepted accounting principles (GAAP) and non-GAAP measures. But a side-by-side comparison suggests that Unity's net losses, which narrowed on a non-GAAP basis in 2021, are more sustainable than Matterport's losses -- which widened significantly by both measures.

Company (Period)

Unity (2021)

Matterport (2021)

Revenue

$1.11 billion

$111.2 million

Net Loss (GAAP)

($532.6 million)

($338.1 million)

Net Loss (Non-GAAP)

($61.8 million)

($46.9 million)

Net Profit Margin (Non-GAAP)

(5.6%)

(42.2%)

Data source: Company earnings reports.

Unity expects to achieve breakeven non-GAAP profits in the fourth quarter of 2022, followed by its first full year of non-GAAP profits in 2023. Matterport expects its non-GAAP net loss per share to more than double this year.

Unity believes its growth will stabilize after it reboots its advertising platform and integrates ironSource. Meanwhile, Matterport will likely struggle to convert its free users (which are causing its cloud infrastructure costs to stay elevated) to paid ones even after it resolves its camera production issues.

The valuations and verdict

Unity and Matterport are both growing at similar rates, and their stocks both trade at about 12 times this year's sales. But if we look at the fundamentals, Unity clearly operates the stronger business.

Unity is already the market leader in video games, and it's leveraging that dominance to expand into new non-gaming markets like digital twins. That expansion could ultimately transform into a more diversified cloud-based software company like Adobe. Matterport is still struggling to expand beyond its initial niche, and its lower-margin camera business continues to throttle its revenue and earnings growth.

Unity faces many near-term challenges, but it still has a better shot at a long-term recovery than Matterport. That's probably why it recently rejected an unsolicited bid from Applovin (APP 4.25%), suggesting it would be wiser to integrate ironSource and fix its struggling ad business instead.