2023-11-17 08:00:00 ET
Summary
- We project Matterport to experience significant cash losses despite our estimates of strong revenue growth.
- We expect the company to see a 58% increase in revenue by 2025, but also face substantial operating losses.
- The National Association of Realtors predicts the real estate market to decline in listing volumes in the coming years, potentially impacting Matterport's growth.
- We scrutinize MTTR's market announcements about key partnerships and find several lack substance.
- One market announcement appears dubious, potentially misrepresenting facts about the product's impact on business.
According to our own forecasts of the next 24 months for Matterport ( MTTR ), we expect the firm will continue hemorrhaging cash, despite our own expectations of double-digit revenue growth and the National Association of Realtors' (the NAR) expectations a rebounding property market in the US (noting we refer to the volume of transactions, and not the value of real estate transactions).
In our previous coverage of the stock, discussed at length how Matterport did not capitalize on COVID lockdowns to grow, when physical inspections of property were difficult or impossible in most global markets. we also discussed the greater product challenges the firm faces outside of market movements.
Looking ahead, the challenges do not look to be easing for Matterport; our forecasts do not predict profitability within a 24 month timeline, even after factoring in reasonable and achievable cost cuts, and the real estate market is not predicted by the NAR to pick up with any great significance to further boost revenues.
Further, the Matterport bulls have stopped crowing about the Metaverse (even Matterport haven't released a presser about the Metaverse since October 2022 , which was viewed at the time as a key driver of potential growth for the firm).
A Quick Primer on Matterport
Matterport is a tech company that has developed innovative hardware and software to capture physical spaces and digitize them (a process that creates a " digital twin " of a physical space) for a variety of applications for users across industries (including clients using the product in marketing real estate for sale or lease , facilities management, architecture & design , and insurance ).
The tech is certainly impressive for first-time users, and certainly in some applications (such as real estate marketing), the high quality of image capture is yet to be matched by competitors.
Bullish pundits point to the tech's affordability for high-quality capture of built spaces, with a variety of theoretical applications, including the Metaverse, engineering and construction , insurance .
However, critics (including ourselves) highlight that the firm has failed to live up to the hype in its financial performance, and note that introducing self-competition between Matterport hardware and smartphones has damaged the value proposition of expensive hardware.
Matterport has had great success in is in real estate marketing and property management , where the technology provides a high-quality inspection of property for virtual tour or a complete record of a building's condition at a point in time.
Forecasting The Next 24 Months For Matterport
To forecast Matterport's next 24 months, we chose to use a linear forecast (line of best fit) given the firm's somewhat consistent growth (as graphically illustrated below), and in our baseline assumed margins and expenditure will also grow in an equally linear fashion. Using annual figures also allows us to avoid seasonal adjustments and focus on year-end results, and we see no reason why the firm will not continue to grow at this pace (for better or worse) due to any product changes or market disruptions outside of extraordinary events.
Further below, we introduce cost-cutting assumptions to see the impact on gross and operating profit.
Further, we note that academic research (such as Green & Armstrong, Journal of Business Research, 2015 ) into forecasting supports simple forecasts compared to complex ones, and hence we believe Matterport's recent history of growth is likely to continue.
In our baseline forecast, we estimate MTTR will end 2025 with approximately $215.82m in revenue, a 58% increase on 2022 results. Our forecast data is available at the end of this article.
Our estimates are supported by Matterport's own revenue guidance of $158.22M in December 2023 (within 0.1% of our estimate) and $177.78M in December 2024 (-5.7% of our estimate).
Dotted lines represent forecast values (Author, Seeking Alpha) Dotted lines represent forecast values (Author, Seeking Alpha)
However, our projected growth figure will be underscored by operating losses of $-342m and $-409m in 2024 and 2025 respectively (assuming that OPEX % of revenues will remain steady, and extrapolating our operating income).
Dotted lines represent forecast values (Author, Seeking Alpha)
On a cashflow basis, we see our P&L forecasts translate to $-173m net change in cash for the firm (though we have not forecast for any investment in securities income/losses or acquisitions, and have not made any cash movement from financing assumptions such as raising capital through debt or equity).
Dotted lines represent forecast values (Author, Seeking Alpha) The firm's forecast cash and equivalents balance. Dotted lines represent forecast values. (Author, Seeking Alpha)
Sanity-checking our forecasts, estimates provided by the National Association of Realtors suggest 2023 will end with a 13% fall in listing volumes vs 2022, and 2024 will post a small rebound, but fall short of 2022 volumes. The US market generates ~60% of Matterport's revenue, representing a significant portion of the firm's business.
Highlighting the importance of this sector to the company, real estate (sales, leasing and commercial sectors) represented as much as 50% of subscription revenue globally in Q3 2023, and residential real estate spaces represent "a majority" of the digital twins being created using the platform, according to CEO RJ Pittman in the 2023 Q2 earnings call .
(Figures in '000s) (National Association of Realtors)
The NAR's figures don't suggest that there will be any extraordinary market activity (positive or negative) in the next 12 months, adding no additional risk to Matterport's growth forecast.
Overall, the linear forecast (which generously suggests sustained double-digit growth) implies serious cost-cutting is required to bring the firm to profitability.
Putting the magnifying glass to MTTR's gross profits, we see a continued falling profitability margin trend since 2020 as the firm's revenue mix trends towards adding on more services revenue (requiring higher cost of labor than other subscriptions or licenses), along with low product margins, weighing on overall profitability.
Matterport revenue recognition breakdown. (Matterport)
Adding to MTTR's profitability woes, the firm's selling & general expenses costs have outpaced revenue since 2021, and have totally eclipsed gross profits almost every year (except 2020).
Revenues & Gross Profits Vs Selling & General Expenses (Author, Seeking Alpha)
Building into our forecast a compounding 10% Cost of Sales and OPEX cut in each forecast period to see the impact moderate and achievable cost cuts would have on the financial performance, does not yield either a positive gross profit, or operating income.
Forecast featuring a 10% compounding cut in COR and Operating Expenses (Author, Seeking Alpha)
We view this lack of profitability in the next 24 months as a concern for investors as our forecast scenarios suggest that exceptionally aggressive cost-cutting (which threatens the established pattern of growth) will be needed to deliver profitability, and halt the cash-burn.
If aggressive cost-cutting is not an option, or fails to bring about net-neutral cashflows, then the firm will need to consider raising debt or capital to sustain its operations, degrading shareholder equity in the firm.
As it stands, tangible assets make up 79% of the balance sheet, however, cash and equivalents makes up 94% of those tangible assets, which we estimate may be exhausted within 3 years even despite cost-cutting efforts.
To reiterate, our thesis sees a significant risk to 94% of the firm's tangible assets within 3 years as a significant risk to investors, despite a strong growth forecast both from our estimates and Matterport's own.
Lots Of Partnership Headlines - But Dig A Little Deeper
Matterport's communications department releases frequent headlines about partnerships with distributors or firms that will address key markets.
But we inspected these a little closer, to verify the impact of these market announcements on the firm's performance.
(The below is not an exhaustive list of partnerships announced, but the list of partnerships we were able to research in-depth since our last coverage)
10 July 2023 - Equinox Technologies
Matterport announced earlier this year they were partnering with a "Regional leader in cloud and geospatial services," to focus on capitalizing on development investment in the United Arab Emirates, India, Oman, Saudi Arabia, and South Africa, by partnering with Equinox Technologies .
But as a "regional leader", the firm lists only 23 staff on LinkedIn, with only 2 of those staff holding roles related to geospatial data work. The firm only has a combined total of 126 followers across Facebook, Instagram & Twitter. The firm enjoys more success on LinkedIn with 3,600 followers. Still, hardly the numbers we'd expect to see from a "regional leader".
We also investigated Equinox's listed addresses to assess their regional presence. Under the " Contact Us " section of their website, we found the following registered addresses:
Dubai
- Cluster M, HDS Business Centre Jumeirah Lake Towers, Dubai, United Arab Emirates
South Africa
- 610, Gallagher Avenue Block D, 1687 Midrand, South Africa
Abu Dhabi
- Office No:10, Building 9 Abu Dhabi, United Arab Emirates
India
- 115, Navrang Plaza, Sapna Sangeeta Road, Indore, Madhya Pradesh
- 3 C, Noel Focus Building Seaport - Airport Road, Cochin, Kerala
Saudi Arabia
- Building 26/27 rd 120 A Support Industries, Jubail Industry City, Jubail, Saudi Arabia
Equinox's India presence lists two offices, the first listed address appears to be a small shop-front amongst a collection of small technology, fashion and discount stores.
A street view of Equinox's India office (Google Street View)
The second address is listed as a more up-market commercial office building just outside of Kochi in the country's South West.
The second listed address of Equinox Technologies in Kochi (Google Street View)
The Saudi Arabian office address appears to be an industrial storage building, and is the listed address of a supply company of tech to manufacturing and construction companies called Digital Keys . It's possible to see how the businesses might be linked or would sensibly share an office space, but it is odd given this is a regional headquarters.
Equinox Technologies Saudi Arabian Office Address (Google Photos)
The listed address in South Africa is amongst a block of stores in Midrand, just north of Johannesburg. We were unable to source a better image of the office itself, but the location and surrounding shopfronts suggests this is only a small commercial lease.
Equinox Technologies South African Office Address (Google Street View)
The Dubai office lists a PO box and an office within the Jumeirah Lake Towers, managed by the HDS Group. The building is a more commercial and appealing-looking space than some of the other listed addresses, however, we were unable to find any third-party sources to confirm if Equinox Technologies was a registered tenant.
Equinox Technologies Dubai office address (Google Street View)
The Oman office address listed is a PO Box, and we were unable to locate a physical office for the firm.
Overall, we hold a somewhat skeptical opinion of Equinox Technologies being a "regional leader" in cloud and geospatial services, and therefore find the market announcement somewhat of a nothing-burger.
TD SYNNEX - 18 August 2022
The headline announcement was that a partnership had been formed with TD Synnex ( SNX ), a distributor with access to 150,000 resellers in North America, certainly what should be a significant partnership.
But looking into the firm's marketing and communications, SNX hasn't made a mention of "Matterport" or "Geospatial" in the last 2 years of 10-Qs or 10-Ks, and is only footnoted on their vendors page under "Additional Vendors".
There is a dedicated Matterport Product page on the SNX website (which can only be found by indexing the site on Google), though staff listed as dedicated product contacts at TD Synnex have either changed roles since the Matterport announcement (Mackenzie Carswell, was Product Manager - Matterport, now a Business Development manager, Robert Sturycz, was Solutions Architect- Matterport, now Solutions Architect III, Mosley Hardy, was a Solutions Architect- Matterport, now a Solutions Architect II) or moved on from the firm altogether (Michael Liberati, was channel Account Manager, now left the firm). The webpage has since not been updated to reflect these changes.
There are no other communications or marketing releases on their site dedicated to Matterport or Geospatial services.
This is all odd given the partnership launched less than 18 months ago, and raises the question of whether SNX has seen success with the product.
Burns & McDonnell - 28 July 2022
A partnership announcement mid-last year was touted to address the needs of Energy, Utilities, and Manufacturing Industries through Burns & McDonnell (a firm focused on the design and construction of infrastructure).
This partnership should in theory be a perfect proof-of-concept of how digital twin technology can be used in the construction industry & asset management with a wide variety of applications.
Looking at the firm's website, two product managers are listed as specialist contacts regarding Matterport. Zachary Wassenberg has since left the company (and the Matterport page on their site has not been updated to reflect their absence), and the other (Teddy Menke, product manager) has since been focusing his posts on social media about other products and services unrelated to geospatial or digital twins tech.
The firm has a very active marketing and communications department, however the company blog hasn't mentioned geospatial services, digital twins or Matterport since August 2021 . Further, Matterport also has not made any further mention of the partnership or shown proof of its success.
The lack of news content from either Matterport or Burns & McDonnell since the partnership announcement draws a question mark over the product's usefulness in the design and construction space.
As part of our research into Matterport's applicability in the engineering and construction space, we have spoken with civil engineers across two firms with experience in BIM (Building information modeling) projects for government and utilities. These interviews focused on the application of Digital Twins for design and construction along with progress updates.
BIM is a complex and sophisticated process of designing and planning construction projects in detail, with multiple "Levels of Development" (LOD) , which refers to the detail level that the building model presents.
The engineers we spoke with have attested that widely available commercial 3D scanning products (including but not exclusively Matterport) often do not have the necessary accuracy for use in design, progress updates or inspections for engineering-specific requirements. Among the challenges, accuracy and compatibility present as barriers for widespread use, however, some limited applications were considered possible and valuable, such as non-technical site documentation and as-built site documentation.
In further defining the issue of accuracy, as one engineer put it to us;
"1mm of variance [in accuracy] doesn't sound like much, but it adds up very quickly across a significant building site."
Matterport's Pro3 camera (their top-of-the-line hardware) has an accuracy of +/- 20mm at 10m.
Eberl - 17 March 2022
We're burying the lede here a bit on this one, but this announcement was a real doozy.
"Top 4 US-based adjusting firm grows customer base by 200 percent with Matterport digital twins " says the market announcement , a big, bold claim that instantly raises an eyebrow. How was this calculated? What's the time period? Is the growth being attributed entirely to the Matterport product?
How is this even possible?
The claim is regarding Eberl, a claims management service business , which is certainly a top adjusting firm, but claiming a 200% growth in customer base is a very big claim to make.
Another question is raised; if you have a 'secret weapon' that is increasing your market share so drastically, would you tell your competitors about it? Your point of difference is at risk, the secret is out there and you lose your first-mover advantage.
The product featured in the announcement is the Matterport Axis , a simple iPhone mount on a tripod for taking 360 degree panoramas.
And it costs $79. Hardly an economic moat stopping competitors from jumping onboard.
Matterport Axis Product (Matterport)
So how is this driving a 200% increase in the firm's customer base? Dig into this story a little further though to find out more, and we notice that the 200% increase in customer base is not a quote attributable to Eberl. Odd, who penned this then?
The story links to a case study, " Eberl Doubles Business Development Success with Matterport ", curiously titled given the headline stat was about a customer base?
It didn't take long to find the details of where this 200% figure has come from, the very first article dot point states:
" 200% lift in success rate for new business pitches by highlighting next-gen adjustment services with Matterport"
This is a far-cry different from a 200% increase in customer base. Those are two wildly different statistics.
Is it possible that Eberl realized both a 200% increase in customer base and 200% lift in success rate for business pitches? No, we don't believe so. Of those two facts, the lift in customer base is greatly more significant than a lift in % of business pitches. And if it were an increase in the count of customers by 200%, such a significant and positive development to be highlighted more explicitly, possibly in financial reports or a dedicated announcement.
We reached out to Matterport's Investor Relations team regarding the headline, asking;
- Can you provide more details on the definition and measures of growth of the customer base?
- How is the 200% lift in success rate for new business pitches related to the claim of a 200% growth in the customer base
- Are there specific metrics or criteria used to quantify the growth in the customer base?
The response we received as follows:
Email response from Matterport's Investor Relations (Author, Matterport)
In a follow-up email, we asked if Matterport would release a retraction or clarification to correct the statement, specifically the headline "…grows customer base by 200 percent,", to which we were told they did not believe the statement to be misleading. They noted however that they did not know the number of customers Eberl has or the growth rate of total customers.
If we were an executive at Eberl, we would be concerned about the potential misuse of their data and claims being made in our name.
Interestingly, in Matterport's most recent investor presentation, the noteworthy absence of a top-4 adjustment firm in their list of partners raised our eyebrows.
Matterport investor presentation 3Q23 (Matterport)
So how important would these partners potentially be to Matterport?
CEO RJ Pittman describes these partnerships such as Equinox Technologies as "major distributors" in earnings calls, but chooses to quantify opportunities by the size of the markets overall that these distributors work in, through metrics such as the square feet of building space in each market (ie, 900million square feet in Mexico) or by property development investment ($1.4 trillion in the Gulf countries).
Little to no detail is given on the value of these partnerships, including the size of tangible opportunity, and the number or value of customers brought on.
Looking 6 months ago at the Q1 2023 earnings call , a Morgan Stanley analyst asked Pittman to provide his opinion on how significant the AWS announcement and Autodesk partnerships were for Matterport.
This analyst highlighted that growth for Matterport was coming primarily from the Services business line (a low-margin business line where Matterport provides the physical service of going onsite to provide the digitization service) and the product line (also a low-margin line, and in recent times loss-making line, involved in the manufacture and sale of physical hardware), rather than from subscriptions and licenses (high-margin business lines from customers using the product and paying monthly recurring revenue).
Pittman pointed out that these partnerships were "in the early stages," and interestingly said "So I also expect that over time, we'll see some progress concluding even more of those transactions, including, you know, or in addition to those that we described in some of our recent press releases which will further create a tailwind in that subscriber growth.", which we interpreted to suggest these were not significant contributors to Matterport's business.
And in the 2023 Q3 earnings call , an analyst from Morgan Stanley again pressed Pittman on what the "...impact has been so far?" from major partnerships with Autodesk & Procore, which Pittman avoided answering directly with any detailed numbers other than to say "...pipeline has been very healthy," and, "We're seeing great results from these expanded partnerships in the quarter, nothing specific to report yet, but moving all in the right direction."
This earnings call was held on the 6th of November, and on the 7th of November, Morgan Stanley lowered their price target for Matterport by 25% from $4 to $3.
Overall it's difficult to quantify the value of these partnerships given the detail is not made available. We believe that the lack of transparency and detail suggests any assumptions or forecasts should not rely on these announcements as lead indicators of growth for Matterport, unless more detail is provided about the growth or revenue generated through these channels.
We highlight the case of Equinox, its status as a "regional leader" is questionable upon closer inspection of its office infrastructure and reach.
Further, Matterport's responses to our inquiries into the Eberl claims further cast doubt in our minds regarding some announcements, particularly around the accuracy or veracity of the claims being made in the partnership announcement.
We believe that the CEO's comments lack of detail or evidence showing the value for the firm should be viewed with skepticism.
Forecasts and Assumptions
Details of our own forecasts and assumptions available below.
Profit & Loss Forecast | Dec-19 | Dec-20 | Dec-21 | Dec-22 | TTM | +12m((FST)) | +24m(FCST) | |
Revenues | $ 46.0 | $ 85.9 | $ 111.2 | $ 136.1 | $ 156.7 | $ 188.66 | $ 215.82 | * Linear Forecast |
Growth Rate | 0 | 87% | 29% | 22% | 15% | 20% | 14% | *Calculation |
Other Revenues | - | - | - | - | - | 0 | 0 | * Zero |
Cost Of Revenues | $ 23.9 | $ 37.9 | $ 51.2 | $ 84.3 | $ 96.1 | $ 115.92 | $ 135.00 | * Linear Forecast |
Gross Profit | $ 22.1 | $ 47.9 | $ 60.0 | $ 51.8 | $ 60.6 | $ 72.74 | $ 80.82 | *Calculation |
Selling General & Admin Expenses | 35.4 | 41.8 | 151.5 | 240.7 | 222.8 | $ 310.55 | $ 367.92 | * Linear Forecast |
R&D Expenses | 17.2 | 17.7 | 55.4 | 85 | 74.6 | $ 104.61 | $ 122.82 | * Linear Forecast |
Total Operating Expenses | $ 52.5 | $ 59.5 | $ 206.8 | $ 325.7 | $ 297.5 | $ 415.16 | $ 490.74 | *Calculation |
Operating Income | -$ 30.4 | -$ 11.6 | -$ 146.9 | -$ 273.9 | -$ 236.9 | -$ 342.42 | -$ 409.92 | *Calculation |
Interest Expense | -1.5 | -1.5 | -0.7 | - | - | 0 | 0 | * No Forecast |
Interest And Investment Income | 0.2 | 0 | 1.8 | 6.3 | 6.5 | 5 | 5 | * Average |
Other Non-Operating Income (Expenses) | -0.2 | 0.1 | -49 | 26 | 0.8 | 0 | 0 | * No Forecast |
EBT, Incl. Unusual Items | -31.9 | -13.9 | -338.3 | -110.1 | -228.6 | 0 | 0 | * No Forecast |
Income Tax Expense | 0.1 | 0.1 | -0.2 | 1.2 | 0.4 | 0 | 0 | * No Forecast |
Earnings From Continuing Operations | -32 | -14 | -338.1 | -111.3 | -229 | 5 | 5 | *Calculation |
Net Income to Company | -32 | -14 | -338.1 | -111.3 | -229 | -$ 337.42 | -$ 404.92 | *Calculation |
Cashflow Forecast | Dec-19 | Dec-20 | Dec-21 | Dec-22 | TTM | +12m(FCST) | +24m(FCST) |
Net Income | - 32.0 | - 14.0 | - 338.1 | - 111.3 | - 229.0 | - 332.5 | - 400.1 |
Cash from Operations | - 26.8 | - 3.6 | - 38.8 | - 118.6 | - 93.1 | - 130.5 | - 155.2 |
Cash from Investing | - 4.9 | - 4.9 | - 541.8 | 95.2 | 57.0 | - 15.7 | - 18.1 |
Cash from Financing | 34.2 | 50.5 | 668.4 | 0.3 | 3.8 | - | - |
Net Change in Cash | 2.6 | 42.1 | 87.7 | - 22.9 | - 31.6 | - 146.0 | - 173.1 |
Total Cash & ST Investments | 8.4 | 51.9 | 404.5 | 472.9 | 445.6 | 299.6 | 126.5 |
FORECAST ASSUMPTIONS | |
Cash Flow From Operating Activities | |
Depreciation & Amortization | * Linear Fcst |
((GAIN)) Loss on Sale of Investments | * Linear Fcst |
Stock-Based Compensation | * Linear Fcst |
Other Operating Activities | * Linear Fcst |
Change In Accounts Receivable | * Linear Fcst |
Change In Inventories | * Linear Fcst |
Change In Accounts Payable | * Linear Fcst |
Change in Unearned Revenues | * Linear Fcst |
Change in Other Net Operating Assets | * Linear Fcst |
Cash Flow From Investing Activities | * Calculation |
Capital Expenditure | * Linear Fcst |
Cash Acquisitions | * No Estimate |
Sale (Purchase) of Intangible assets | * Linear Fcst |
Invest. in Marketable & Equity Securt. | * No Estimate |
Other Investing Activities | * No Estimate |
Cash Flow From Financing Activities | * Calculation |
Long-Term Debt Issued | * No Estimate |
Total Debt Issued | * No Estimate |
Long-Term Debt Repaid | * No Estimate |
Total Debt Repaid | * No Estimate |
Issuance of Common Stock | * No Estimate |
Repurchase of Common Stock | * No Estimate |
Other Financing Activities | * No Estimate |
Cash from Financing | * Calculation |
Foreign Exchange Rate Adjustments | * Average 0.2 |
Net Change in Cash | * Calculation |
Risks to This Thesis
Our thesis is not without its risks and weaknesses, as we note early in the article that Matterport has a history of continued growth, and it is likely to continue on this trajectory.
While the firm's balance sheet may be under threat from continued unprofitability, management will no doubt take action to ensure the firm's continued operation and cut costs to ensure ongoing solvency. Should the firm turn profitable, outside of our forecasts, the nature of the firm's valuation requires reassessment.
While Matterport has not released figures that detail a breakdown of its customers by sector or industry, we believe (from mere observation and industry knowledge alone) that Matterport is significantly exposed to the property sales and property management industries. Should the property market see a rise in the volume of listings beyond the National Association of Realtors' expectations, this would provide a ground-swell that drives growth in revenue for Matterport, especially in the higher-margin Subscriptions business as marketers take to the product to promote listings for sale or lease.
Further, we note that the recent partnership with AWS TwinMaker is significant and we believe could be of real value to the product in its applications, which could in time be realized through take-up of the software. This along with integrations with AutoDesk Construction Cloud shows the firm is focused heavily on improvements and applications within the design and construction space. These are positives, but we are not yet seeing the benefits flow through the company.
Closing Thoughts
Overall, it's hard to see how Matterport is worthy of a 4.10x Price to Sales ratio as at November 5, 2023 (while the Information Technology sector averages 2.52x), with poor profitability outlooks in forecasts and nothing-burger market announcements that add no significant value (amid some arguable misrepresentations of fact).
Given the cash and equivalents forecast suggests a potential shortage of cash within two years and no profitability in sight, we can only see further share price downside in MTTR's future.
For further details see:
Double Digit Growth Can't Save Matterport - And Why The Headlines Aren't All They Seem