A few days ago, we wrote about bargain hunting for software-as-a–service (SaaS) stocks. The piece was partly about finding value in legacy software companies making the transition to a SaaS business model. In the article, we used PTC Corporation (PTC), a software company that specializes in building design software that has expanded into IoT and augmented reality, as an example. Regular readers know that we favor SaaS business models because these companies should (if they’re doing it right) enjoy predictable, recurring revenue and fat gross margins. In the case of PTC, the move to the cloud especially makes sense given the focus on helping its customers with their own digital transformation by creating digital twins or digitized, interactive copies of things as complex as factories using sensor data and other sources.
Last year we took a look at Matterport (MTTR), a spatial data company that creates digital twins using AI to transform imagery into virtual spaces. The proposition is that tenants can tour a potential apartment from their couch or engineers can review construction progress remotely. The former Silicon Valley startup merged with a special purpose acquisition company (SPAC) in July 2021, not long before the metaverse hype reached a crescendo. By the time we got around to doing our first analysis of Matterport stock post-SPAC, the share price reflected a richly valued metaverse play. Let’s see what’s happened in the last 12 months.
About Matterport Stock
In January 2022 when we wrote our last article, Matterport stock sported a market cap of $4.765 billion and annualized revenue of more than $110 million, giving us a simple valuation ratio of 43 and change. These days, we consider anything north of 20 to be overvalued. In the waning days of January 2023, Matterport stock is wavering around a $1 billion market cap. The midpoint of Q4-2022 guidance from management predicts revenue at $40 million which gives us a new simple valuation ratio ($1 billion/$160 million) of about 6 which is now inline with our tech stock catalog average. The question is whether we think Matterport stock is worth picking up at this (or any other) valuation.
Shifting to SaaS?
Like PTC Corporation, Matterport stock is a play on digital transformation. (In fact, the two companies announced a platform integration the same month the latter merged with its SPAC host, combing Matterport’s spatial data with PTC’s interactive AR tech to create large interactive spaces.) And, like PTC Corp, Matterport is trying to shift its revenue stream to a SaaS model. For PTC, that means moving its on-premise legacy software to the cloud. For Matterport, it’s a matter of switching from a hardware-centric business that relied on its line of high-tech cameras to AI-powered software that can do nearly as good a job with a smartphone.
Let’s be clear: Matterport is not exactly abandoning the hardware. The company recently released its Matterport Pro3 camera, which sports new sensors and a state-of-the-art LiDAR that does a lot of the processing at the edge with onboard AI. With a range of 100 meters, the Pro3 is obviously made for big jobs, like digitizing stadiums and arenas. Matterport introduced a second piece of hardware last year called Axis. A hands-free motor mount for precision 3D capture with smartphones, Axis is more than a fancy camera tripod. It offers individuals and small businesses a relatively cheap way to use the company’s cloud-based SaaS solution that creates, publishes, and manages digital twins of buildings and spaces. The device is intended to encourage mass adoption of the company’s software through a mobile app subscription.
At the heart of the company’s SaaS solution is Cortex AI, a deep learning neural network that creates the 3D digital twins and automates many of the things normally performed manually. For example, the AI can identify different rooms within a space, as well as the objects within each room. It can also measure spaces with 99% accuracy. In addition, algorithms offer other kinds of analytics, such as assessing the amount of natural heat and daylight coming from specific windows.
Subscribers by the Numbers
So, how’s the big move to a SaaS business actually going? Well, Matterport grew its subscriber base to 657,000 subscribers in Q3-2022, which was up 50% from the year-ago quarter. It also increased its spaces under management to more than 8.7 million spaces, representing a jump of more than 40% compared to the same time last year. But about 90% of subscribers use the free version of the software. The number of paying subscribers increased just 15% versus 35% for the freeloaders.
Another metric for tracking subscriptions is net dollar retention, which is a fancy way that MBAs account for how much additional money a company can squeeze out of its customers on a quarterly or annual basis. A 100% net dollar retention rate means that existing customers spent the same amount of money during the present period as the previous one. In Q3-2022, Matterport posted a retention rate of 106%, which is pretty ho-hum, and down from 114% a year ago. On the plus side, more than 40% of subscribers are from outside of the United States.
Drilling Into Revenue
Let’s move from percentages to dollars. Matterport expects full-year 2022 total revenue in the range of $134 million to $136 million, with subscription revenue falling between $73.5 million and $73.7 million. That means subscriptions will account for about 54% of total revenues in 2022, which is about the same percentage as 2021. This is not where the company originally promised to be based on the shiny SPAC investor deck circa H1-2021.
For 2022, for example, Matterport projected total revenue of $202 million, with $131 million in subscription revenue – essentially equal to its actual total expected revenue for the year. By 2025, the company said subscriptions would make up about 86% of total revenue, according to the chart above. That seems highly unlikely based on revenue through the first nine months of 2022:
While product revenue is slowly dropping off, subscriptions only account for about half of revenue gains. Service revenue is driving the other half, basically doubling compared to a year ago. Service revenue is money made off of enterprise clients who hire Matterport to scan their properties using their fancy cameras and professional know-how. The recent acquisition of VHT Studios, a U.S.-based real estate marketing company, is mainly a driver of services revenue, contributing $4.5 million to the bottom line in Q3-2022.
One might assume the big bump in services revenue means that Matterport is growing its enterprise customer base significantly. However, it could just be the case that a handful of clients have outsized projects. For example, Matterport just announced a deal with John Deere, the world’s biggest manufacturer of farm equipment. John Deere will use Matterport’s Digital Twin Platform and 3D capture technology to build a virtual operations center for remote management of more than 60 facilities across North America, South America, Europe, and Asia. Admittedly, it’s unclear if the contract includes professional capture services, but this seems like the kind of project that would require the pros.
Should You Buy Matterport Stock?
The bottom line is that revenue and subscriptions aren’t really growing as planned, so are there any reasons to be optimistic about Matterport stock? It’s a tough sell if you look at other metrics.
For example, gross margin for the first nine months of 2022 was just 42% compared to 58% at the same time a year ago. If you pull out just subscription revenue, the numbers look a little better at 67% gross margin, but down from 76% during the same nine-month period in 2021. The gross profit on service revenue is fairly slim at 30%, and it still costs more to make the hardware than the company can actually sell it for to customers. On the plus side, Matterport had about $495 million in cash and investments, with zero debt, as of September 2022, so it can continue to burn cash for a while.
There are companies that we want to like because we really believe in the theme, like 3D metal printing. We always liked Desktop Metal (DM), but the company’s decision to go public through the SPAC backdoor and other decisions have seen the stock hit the bargain bin – and we’re still unwilling to touch it (update coming soon). Ditto for Rocket Lab (RKLB), a space company stock that has fallen back to earth but could someday be worth adding to the Nanalyze Disruptive Tech Portfolio.
Similarly, we always thought the digital twin market has huge potential, with one estimate (from Matterport) claiming a total addressable market of $260 billion. As a pure-play stock in the category, Matterport is a company we want to like more than we do. But the facts are that year-over-year growth for 2022 will clock in under 20%, with lower gross margins and subscriptions as a percentage of revenue remaining flat. In addition, subscriptions are billed both monthly and annually, so the amount of annually recurring revenue is likely much smaller than the $73.7 million in projected 2022 subscription revenue. Most importantly, the management team failed to execute on their promises by a wide margin. As risk-averse investors, we just don’t see a compelling reason to invest in Matterport stock based on its current performance and trajectory.
Conclusion
Wait! What about Matterport as a gateway into the metaverse, you may ask? While some may argue the metaverse is inevitable, the transition to an immersive digital life is hardly assured. Certainly, no one really knows how it will gain tipping-point traction. The first wave of metaverse-related technologies like NFTs and cryptocurrencies have mostly crashed (sure, bitcoin has bounced back a bit). How important is the metaverse to Matterport? In its SEC filings and earnings calls, the company never once alludes to the digital play world of Mark Zuckerberg. The metaverse may not be dead, but Matterport needs to stay grounded in the real world for now.
