Although much of the hype around the metaverse has evaporated, plenty of companies are still working toward its fruition. Most of these companies are working on products that have real-world use as well as digital potential. It's these stocks that have the potential to be the best investments, as the thesis for investing in them has at least two viable paths to great outcomes.

One metaverse-linked company that the market now shuns (despite reporting solid results) is Matterport (MTTR 0.22%). Should investors use the stock's current weakness to establish a position, or is the stock still too inflated? Let's find out.

Digital twins are Matterport's specialty

If you've ever been house hunting online and come across a real estate website offing an online virtual walking tour of the home with a 3D view, then you've probably interacted with Matterport's product. Its software system allows users to photograph (using one of its high-quality 3D cameras or even a smartphone) a space, and then incorporate those images to create a digital twin of the space.

Digital twins can be put to multiple uses, including helping test different industrial layouts, visualizing a construction project, visiting a landmark digitally, or the aforementioned tour of a home for sale. Its applications in the metaverse range from practical to recreational to informational, making this software system vital to metaverse development.

A Matterport rendering of a house that is for sale.

Image source: Matterport. 

This usefulness drove a lot of hype for the stock when it came public via a SPAC (special purpose acquisition company) last year. At its peak, Matterport stock traded for over $30 per share, but it now trades at around $6, down 81% from its all-time high.

Exceptional results in Q2 for Matterport

The thing is, if Matterport keeps reporting earnings like it recently did, the stock may not stay beaten down for long.

In the second quarter, Matterport's subscription revenue rose 20% year over year to $18.4 million, while its service revenue rocketed 74% higher to $5 million. Matterport's service segment benefited from a seven-figure contract won during the first quarter and realized $400,000 (nearly 10% of service revenue) during the second quarter. This boost is a good sign, as Matterport's large customer base is utilizing its services much quicker than expected.

While subscription revenue didn't grow as fast, the number of subscribers did. Matterport saw 52% subscriber growth during Q2, which will, in turn, drive revenue growth once these new customers fully utilize Matterport's potential.

Finally, Matterport's product revenue (its specialized cameras) had a disastrous quarter, with only $5.1 million in sales versus $9.2 million last year. Management blamed these sales on the supply chain but noted that the company had reached a record backlog of open camera orders, showcasing the demand for its product. Unfortunately, it just can't fulfill it.

As for revenue guidance, Matterport expects 30% revenue growth across the board and 19% subscription growth. In the current economic environment, this guidance was strong and reflected a demand for its product, even though businesses are tightening expenses.

Still, Matterport isn't profitable and lost $64.6 million on a generally accepted accounting principles (GAAP) basis when compared to revenue of $28.5 million. Even from a non-GAAP basis, Matterport still lost more than it brought in at a $35.3 million loss. However, Matterport has plenty of resources to survive, with $476 million in cash and short-term investments.

It's best to consider Matterport a moonshot stock

Because the company can't even sniff what profits are, it's best to value the stock on a price-to-sales basis. With Matterport trading for 14 times sales, it's an expensive stock. However, with the Matterport-estimated $240 billion total addressable market, it's got a massive runway in front of it.

I think that is what best describes Matterport's stock: a moonshot. If the company's product seriously takes off, the stock growth will create a massive return for your portfolio. However, if it never reaches profitability and fades away, the position sizing needs to stay small enough not to affect the overall portfolio. With this in mind, I don't think it's wrong to take a position in Matterport, but investors need to be aware that while the company exceeded expectations this quarter, it has a long runway before breaking even.

In my opinion, there are better stocks out there than Matterport, but if you choose to purchase it, make sure the position size reflects the relatively high risk of this young company.