2023-10-17 09:45:51 ET
Summary
- Matterport has seen significant subscriber growth, expanding its base by 34% YoY to over 827,000 in Q2 2023.
- The company offers a unique value proposition with competitive advantages in the digital twin technology market.
- Matterport is on a path to profitability, with reduced operating expenses and a clean balance sheet providing ample liquidity.
- The market is overly focused on monetization, which will gradually come. Business is seeing fundamental growth. Shares should rerate.
Investment Thesis
Matterport (MTTR) is the pioneer and category leader in digitizing physical spaces and turning them into 3D photorealistic digital twins. The company has seen astonishing subscriber growth, expanding its subscriber base by 34% year-over-year to 827,000 paid subscribers as of Q2 2023. However, the stock has cratered over 90% from all-time highs as its valuation reset amidst interest rate hikes and the general rout out from tech. I argue the concerns are temporary and overblown. Matterport offers a unique value proposition that is continuing to drive subscriber growth, and the company has ample liquidity to ride out near-term monetization headwinds before gradually improving monetization. With the stock trading at an EV/Sales ratio of just 1.37, I believe the pessimism is overdone and Matterport remains a speculative buy for long-term investors.
Strong Value Proposition and Competitive Advantages
Matterport's digital twin technology has clear competitive advantages. It offers the only end-to-end automated solution to turn buildings into dimensionally accurate 3D models accessible from any device. Competitors either offer piecemeal point solutions for specific industries or lack Matterport's AI-powered reconstruction technology that works for any building type. Matterport also has first mover advantage, having pivoted to a software-driven subscription model years ago and amassing the world's largest spatial data library with over 10 million spaces digitized.
This provides a powerful network effect - more data improves the AI, leading to better digital twins and insights, and attracting more subscribers and data. Matterport estimates its total addressable market at over $240 billion based on the global building stock. The company is penetrating this immense opportunity efficiently through its land and expanding model across industries like real estate, retail, insurance, and facilities management.
As CEO RJ Pittman explained on the company's Q2 2023 earnings call , "Businesses of all sizes continue to embrace our digital twin platform across the vertical markets we serve. Increasingly, they're achieving significant productivity gains by employing Matterport software for facilities management, space planning and utilization by reducing the need for onsite travel and promoting efficient digital collaboration."
Path to Profitability
In 2022, Matterport made significant progress in reducing operating expenses and driving toward profitability. The company has pulled forward its target of reaching operating cash flow breakeven by a full year from 2025 to 2024 . It is dramatically improving cash flow from operations through initiatives like its recent workforce restructuring. Per CFO JD Fay on the earnings call: "We have taken specific and measurable actions to accelerate our path to profitability ... and now these actions are becoming visible in our financial performance."
With its clean balance sheet, Matterport has ample liquidity to drive toward profitability without any bankruptcy risk in my view. The company ended Q2 2023 with $446 million in cash/investments and virtually no long-term debt. The stock is priced in a doomsday scenario that I believe is extremely unlikely given the balance sheet strength.
Overblown Monetization Concerns
The biggest bear case is that Matterport has been unable to monetize its impressive subscriber growth. Revenue grew only 22% in 2022, with product and services revenue growth outstripping 18% growth in higher margin subscription revenue. However, total revenue growth accelerated to 39% year-over-year in Q2 2023, which should somewhat address concerns about slowing growth.
The slowdown seems more tied to specific temporary headwinds like supply chains and a weak real estate market. Matterport continues to make progress driving adoption across industries. Per CFO JD Fay on the Q1 2023 earnings call : "Revenue from our real estate end market increased from the year-ago period, this growth was eclipsed by strong double-digit growth in facilities management and retail, construction, insurance and travel and hospitality."
New product initiatives like Digital Pro are also showing strong initial traction amongst real estate professionals. As CEO RJ Pittman explained on the Q1 2023 earnings call: "The initial response is excellent, A large portion of new customers are choosing Digital Pro while a significant number of agents are upgrading from using photos only to the complete Digital Pro package, often for the same or lower price."
While monetization has been slower than expected, Matterport's growth trends remain impressive given the macro environment. As headwinds abate, monetization should follow.
Attractive Valuation
Matterport currently trades at an EV/Sales ratio of 1.37x based. This represents a steep discount to the median sector ratio of 6.33x for internet software stocks .
Even more glaring is the disconnect between Matterport's valuation and projected revenue growth. Consensus estimates call for ~15% revenue growth over the next two years, yet Matterport trades at lower multiples than slow-growing software peers.
The discounted valuation limits downside risk while providing substantial upside potential if Matterport executes on monetizing its platform and massive subscriber base over time.
Risks
Matterport faces risks that could derail the investment thesis:
- Prolonged real estate market weakness prevents monetization of the company's significant exposure to that sector
- Growing competition from companies like Zillow and Compass commoditizing digital twin technology
- Matterport fails to effectively monetize its subscribers and spatial data over time
- Cash burn continues despite restructuring initiatives, putting the balance sheet at risk
The stock however already seems to have priced in significant execution risks, limiting further downside.
Conclusion
Matterport is not a risk-free investment, as the company must still prove it can monetize subscribers profitably over time. But with the stock trading at 1.3x EV/Sales and a high cash balance limiting the downside, Matterport remains a compelling speculative buy.
The company is executing operationally, despite Wall Street's gloom sinking the stock. Matterport's impressive platform and subscriber growth suggest it can overcome current monetization struggles. For long-term investors, the risk-reward skews positively for this category-defining business.
For further details see:
Matterport: Impressive Subscriber Growth Being Underrated Due To Temporary Monetization Issues