Matterport (MTTR 0.87%) had the misfortune of coming public by being acquired by a special purpose acquisition company (SPAC) on July 23, 2021, a period when investors were beginning to become disillusioned with the high-risk nature of SPACs. Regardless, there are reasons an investor might be interested in investing in this company, despite the down market.
Here is why Matterport has strong upside potential.
An enormous growth opportunity ahead
Matterport is part of a new little-known industry that creates virtual models that accurately represent physical objects. These models are known as digital twins. Organizations use digital twins in residential and commercial real estate, facilities management, retail, architecture, engineering and construction, insurance and repair, and travel and hospitality. They allow companies to manage properties remotely, monitor building construction, provide virtual open houses to sell real estate, and accurately document claims.
The company believes its total addressable market is more than four billion buildings and 20 billion spaces globally -- a more than $240 billion market opportunity with the possibility of growing to more than $1 trillion. And as of the end of the quarter ended in June, the company only produced $111.7 million in revenue on a trailing-12-month basis -- only penetrating 0.05% of its opportunity.
The company has significant competitive advantages
Despite only penetrating a tiny sliver of its market, the company is a leader in the digital twin industry.
Over a decade ago, the company started its journey to becoming a market leader by being the first to digitize and collect spatial data. Matterport has scanned and filed approximately 8 million spaces on its platform, and it has around 616,000 subscribers to its 3D capture service.
Image source: Matterport.
Matterport's 24 billion square feet of spatial data captured is 100 times larger than the rest of the market, which helps serve as a competitive advantage, making it difficult for any new copycat competitor to catch up. Moreover, this spatial data that Matterport has collected doesn't just sit collecting dust. Like how Google uses data from searches to improve its services and products, Matterport applies analytics and artificial intelligence (AI) on spatial data to improve and develop new products and services for its customers long before any competitor.
The data the company collects also has a network effect associated with it. The more spatial information it runs through its purpose-built AI, Cortex, the better insights Matterport can give customers on its platform. As a result, each new customer improves the service for every other customer -- creating an extraordinarily sticky service.
Last, it has a broad patent portfolio developed over the last decade. As of 2021, Matterport had 50 issued and 24 pending patent applications.
Beware revenue declines and unprofitability
There are two reasons the company dropped approximately 89% from its all-time high closing price of $33.05 on Nov. 29, 2021.
First, Matterport is losing money in a rising interest rate environment -- bad news.
Second, total revenue declined 3% year over year to $28.5 million in the second quarter. Nothing is worse than a growth stock displaying stagnating growth ahead of a possible recession.
MTTR Revenue (Quarterly) data by YCharts
However, it is not all bad news. Matterport generates revenue from subscription, service, license, and product segments. Subscription and service, a source of over 80% of its total revenue, had very healthy growth in Q2.
Image source: Matterport.
The reason for the 3% decline in total revenue becomes apparent when looking at its 99% decline in license revenue and 45% decline in product revenue, which overwhelmed the growth from subscription and service.
The license revenue portion should bounce back, as it is a cyclical business that can fluctuate from period to period. And product revenue, its business selling 3D scanning cameras, faces fixable supply chain disruptions, not a demand reduction. Additionally, since the license and product segments are noncore areas of the business, over the long term, as the subscription and service segments continue to grow, license and product revenue declines or fluctuations should have less effect on total revenue.
Is Matterport a buy?
The company currently sells at a price-to-sales (P/S) ratio of 8.8, compared to the overall technology sector P/S ratio of 3.1 -- a high valuation.
Should the economy worsen, the stock could drop significantly from this point -- a reason risk-averse investors should probably avoid it. However, the market values the stock highly because it has significant upside potential when the economy eventually recovers. So if you are a long-term investor willing to speculate and can withstand short-term market gyrations, now might be a great time to pick up a few shares.
