Matterport's (MTTR -1.37%) stock surged 24% on Nov. 11 after the 3D spatial mapping company posted its third-quarter report. Its revenue rose 37% year over year to $38.0 million, beating analysts' estimates by $1.8 million. Its adjusted net loss widened from $14.0 million to $26.9 million, or $0.09 per share, but still cleared the consensus forecast for a $0.13 loss per share.

This earnings beat turned a lot of heads, but its stock remains down more than 80% for the year. Is it finally time to bet on Matterport's long-term recovery, or is it still too early to turn bullish on this small-cap company?

A person examines a 3D model of a house on a tablet.

Image source: Getty Images.

Carving out a niche market with "digital twins"

Matterport sells high-end 3D cameras for scanning "digital twins" of real-world locations like homes, offices, and stores. It also develops the software for scanning those places, which is compatible with third-party 3D cameras as well as its own iOS and Android apps, along with a subscription-based cloud platform for storing the digital models.

Those twins must be stored on Matterport's servers to be accessed by other apps or websites. That's the basis of its freemium model: Its free subscribers can store a single digital twin on its cloud platform, while paid subscribers have more options.

Matterport generated 57% of its revenues from its paid subscriptions in the first nine months of 2022. Its licenses and professional capture services accounted for another 20% of revenue, while the remaining 23% came from its products -- which mainly consist of its first-party cameras and accessories.

How fast is Matterport growing?

Matterport's revenue surged 87% in 2020, but growth slowed to just 29% in 2021 as supply chain headwinds curbed its production of 3D cameras. Revenue is up just 13% to $95 million in the first nine months of 2022, and management expects 21% to 23% growth for the full year, or about $135 million at the midpoint. That late acceleration can be attributed to supply chain improvements and its acquisition of the real estate marketing firm VHT Studios in July.

The company's total number of subscribers grew 7% sequentially and 50% year over year to 657,000 in the third quarter. But most of those subscribers were still on free plans: Its number of paid subscribers rose less than 2% sequentially and 17% year over year to 63,000. That slower growth in paid users is worrisome, since its free users don't contribute any recurring revenues while driving up its cloud-hosting expenses.

To make matters worse, its camera business is still unprofitable. Its product segment generated $21.4 million in revenue in the first nine months of 2022, but those sales were completely erased by its $24.3 million in cost of revenues.

On the bright side, its number of digital spaces under management increased 40% year over year to 8.7 million, making it roughly 100 times larger than the rest of its niche market. Its net dollar expansion rate, which gauges its year-over-year revenue growth for existing customers, also remained comfortably above 100%. Matterport's enterprise value of $518.6 million also values the company at just over 3 times next year's sales -- so its downside potential might be limited at these levels.

But will Matterport ever generate a profit?

Matterport is growing, but it's still deeply unprofitable. On a non-GAAP (generally accepted accounting principles) basis, its net loss widened from $11.5 million in 2020 to $46.9 million in 2021. It has also widened year over year from $21.9 million to $90.1 million in the first nine months of 2022. In other words, there's no proof its business model is actually sustainable: As long as it's gaining free users at a faster clip than its paid users and taking losses on its cameras, it will continue to lose money.

Its pricing power could be limited by larger competitors like Unity Software and Adobe, which both recently added 3D scanning tools to their platforms. Its camera business is also exposed to competition from other 3D cameras like the GoPro Max and could be cannibalized by its own iOS and Android apps.

Unless Matterport addresses those pressing issues, its stock will remain under pressure over the long term -- even if it experiences a few short-term rallies after clearing Wall Street's low quarterly expectations. That's probably why Matterport's insiders sold nearly three times as many shares as they bought over the past 12 months.

Is it the right time to buy Matterport?

Matterport definitely won't go bankrupt anytime soon. It still held $495 million in cash and investments at the end of the third quarter, and its near-zero debt-to-equity ratio gives it plenty of room to raise more cash.

But Matterport also isn't a turnaround play yet. Its core base of revenue-generating subscribers is tiny, its expenses continue to outpace sales, and it still doesn't have much of a moat against bigger challengers. Therefore, investors should avoid Matterport until it shows signs of overcoming these fundamental issues.