2023-10-16 18:05:44 ET
Summary
- Matterport's business is growing, despite difficult conditions in the US residential real estate market.
- This means little at the moment though, as Matterport's operating expenses call into question the viability of the company.
- Matterport's valuation may make the stock appear attractive, but there is a high risk of dilution undermining future returns.
Matterport's ( MTTR ) business is growing, despite difficult conditions in its core real estate market. The company has done little to convince investors that it can rein in costs and efficiently drive growth though. Some of Matterport's cost issues are likely to resolve themselves in a healthier demand environment, and AI-enabled products could lead to stronger growth and improved margins. Given the size of Matterport's losses, it is difficult to see the company moving towards profitability any time soon though.
Market
Matterport’s technology gives it exposure to a number of end markets, but the US residential real estate market is by far the most important. This is weighing on the business at the moment, as the current combination of mortgage rates and home prices has largely caused the market to freeze up. For example, existing home sales were lower by 18% YoY in the second quarter on a seasonally adjusted annual basis. Despite this, Matterport added nearly 660,000 new digital twins to its platform in the second quarter, the majority of which were related to residential real estate.
Around 50% of Matterport’s subscription revenue comes from non-real estate customers, with strong growth coming in areas like construction, travel and hospitality, facilities management and insurance.
Figure 1: Existing and New Home Sales in the US (source: Created by author using data from The Federal Reserve)
Matterport
Despite tough market conditions, Matterport’s business continues to expand, with spaces under management hitting 10.5 million, and the company’s subscriber base expanding to 827,000.
Matterport’s Digital Pro content marketing package is gaining traction with real estate brokerages and agents, achieving 100% sequential growth. 74% of real estate agents report that they win more listings when they offer Matterport digital twins.
Matterport’s spatial data library has now expanded to 33 billion square feet of physical space, aided by Matterport’s Pro3 camera enabling customers to capture larger spaces. It could be argued that this data asset strengthens Matterport’s competitive position, and the company believes it can improve monetization through AI solutions.
Cortex AI and Property Intelligence are currently Matterport’s most prominent AI solutions. Cortex AI utilizes a neural network to create 3D spatial data from a variety of capture devices including Lidar cameras, the Matterport Pro2, 360 cameras, and smartphones.
Property Intelligence provides insights into physical spaces, like automatic measurement of dimensions, assessment of the condition of a space and assessment of material type. Property intelligence is currently being piloted with some customers, and Matterport expects to announce general availability later this year.
Matterport also recently announced Genesis, a service that combines Property Intelligence with Generative AI to automate design, planning and property management. Genesis allows digital twins to be easily manipulated in dimensionally accurate, photorealistic 3D, with use cases including:
- Interior Design
- Design & Construction
- Energy Efficiency
- Maintenance & Repairs
- Safety & Security
Financial Analysis
Matterport’s revenue increased by roughly 39% YoY in the second quarter, with growth driven by solid enterprise adoption and steady improvements within SMBs. Europe, the Middle East and Asia were areas of strength, all recording double-digit growth. Matterport had 827,000 subscribers at the end of the second quarter, with 69,000 paid subscribers. The company’s free subscriber count increased 37% YoY and the paid subscriber count increased by 11%. Matterport’s net dollar expansion rate was 100% in the second quarter, with weakness caused by a large contract with a public sector customer. Absent this, Matterport’s net dollar expansion rate would have been 103%.
Figure 2: Matterport Search Interest and Revenue (source: Created by author using data from Matterport and Google Trends)
Services revenue was 10.7 million USD in the second quarter, increasing roughly 113% YoY. Matterport helps customers to capture data and create digital twins, which brings data onto the platform, but this is a relatively low-quality source of revenue. Customers also continue to adopt add-on services for areas like BIM, insurance and digital property marketing. Product revenue was 8 million USD in the second quarter, up 58% YoY driven by demand for the Pro3 camera. Despite this, product revenue has been fairly flat over the past three years.
Matterport recently increased prices across its standard subscription plans by approximately 7-11%, which is expected to have a positive impact on subscription revenue in coming months, although this has already been factored into guidance. Matterport has seen a slight uptick in churn, but this has been offset by more customers than expected converting to annual plans.
Revenue is expected to increase approximately 3% YoY in the third quarter, with subscription revenue anticipated to grow 15% YoY. For the full year revenue growth is now expected to be approximately 16%.
Figure 3: Matterport Revenue (source: Created by author using data from Matterport)
Matterport’s subscription gross profit margins are high, which is a long-term tailwind as the relative importance of subscription revenues is increasing. Improvements in subscription gross profit margins over the past year are the result of efficiency improvements related to customer support and the processing and hosting of customer data. Pricing should also be a gross profit margin tailwind going forward.
Recent improvements in product gross profit margins have been driven by supply chain challenges easing. An inventory excess and obsolescence reserve dragged margins lower in the second quarter though, and as a result, product gross margins are expected to improve into the mid-teens for the balance of the year.
Figure 4: Matterport Gross Profit Margins (source: Created by author using data from Matterport)
While Matterport’s gross profit margin issues are resolving, the company still has a large operating expense problem. Matterport’s operating profit margin was around -150% in the second quarter. Much of this is the result of non-cash expenses though as Matterport’s operating cash flow was only -12.4 million USD in the second quarter. Matterport’s relatively strong balance sheet and modest cash burn affords the company a long runway, but this is likely to be little comfort for existing shareholders, who face low growth and high dilution.
Figure 5: Matterport Operating Expenses (source: Created by author using data from Matterport)
Valuation
Based on its gross profit margins, EV/S multiple and recent growth rate, it could be argued that Matterport is undervalued. Matterport has extremely large operating expenses though, which is not just a result of the company investing through the income statement. Ignoring the impact of relatively easy YoY comparable periods, Matterport's current growth rate is actually fairly modest. The combination of modest growth and large operating losses mean that existing shareholders are likely to face serious dilution in coming years.
Figure 6: Matterport Relative Valuation (source: Created by author using data from Seeking Alpha)
For further details see:
Matterport: Operating Expenses Are Troubling