Matterport: Still too early to hunt (NASDAQ:MTTR)

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Matterport (NASDAQ: MTTR) has a bright future in spatial data reshaping the commercial real estate industry, but the company is still struggling to grow subscriptions significantly. Stock Traded Too Cheap In The $2s, But Big Earnings gains in the last quarter were attributable to an acquisition. My investment thesis is still neutral on the stock after Matterport fell significantly from the previous call at $6.

Subscription struggles

Matterport leverages capturing a digital twin in the real estate market to drive recurring subscriptions by providing customers with online spaces featuring virtual tours, security, and space management. The company has struggled for most of the past year to provide the cameras needed to capture these digital spaces, which has slowed its growth.

The company reported in the third quarter of 2022 that revenue jumped to $38.0 million, but the sharp increase in revenue was primarily due to the acquisition of VHT Studios. The company is helping Matterport expand its efforts around capturing digital spaces for customers who don’t want or can’t use Pro 3D cameras or smartphone apps.

Services revenue tripled to $10.0 million, but the total was only up $5.0 million from the second quarter level. The acquisition of VHT Studios generated $4.5 million in additional revenue for the quarter, accounting for the vast majority of the revenue gain in Q3’22. Major subscription revenue increased only slightly sequentially, from $18.4 million to $19.0 million. Additionally, Matterport only guided Q4’22 subscription revenue mostly flat at $19.1 million in Q4’22.

Subscription slide

Source: Matterport Q3’22 presentation

The frustrating part about the company is that the CFO described services growth on the Q3 2022 earnings call as extraordinary without properly highlighting the VHT impact:

Services revenue for the third quarter reached a record $10 million, a extraordinary 204% increase year on year. Our services revenue continued to grow in the quarter, exceeding our expectations and the acquisition of VHT, which met our expectations, provided strength in this revenue line.

The subscription business has gross margins of 77% while services and products (cameras) have margins below 40%. Cameras are mostly sold at cost, with Products only offering 13% gross margins in the last quarter, while Services have a decent 35% gross margins. Typically, however, the focus is on services and products to help customers onboard, resulting in faster subscription starts and higher recurring revenue.

Matterport continues to have a strong funnel with 657,000 subscribers using the platform for basic space management, but the company only has 63,000 paying subscribers. During the year, the funnel grew by 50%, but the actual number of paying subscribers only increased by about 17% from last quarter’s 54,000 subscribers. As a result, the company only guided a 20% growth in subscription revenue in the fourth quarter.

Subscription slide

Source: Matterport Q3’22 presentation

Valuation struggles

Although Matterport has a lot of promise when it comes to managing digital spaces, the company spends a lot compared to the actual gross profit. Matterport produced just $16.4 million in third-quarter gross profit, up slightly from the $14.2 million it produced last year.

The digital space company posted a non-GAAP loss of $26.8 million due to operating expenses of $75.4 million and $45.4 million excluding stock-based compensation . The huge disconnect is problematic in valuing Matterport well above the current market capitalization.

After the big 25% rally after Q3’22 results, the stock now has a market capitalization reaching $1.1 billion. Matterport has a revenue rate of just $152 million, and nearly half of that revenue is from low-margin business.

The company has $495 million in cash without any debt. The stock had traded toward the cash balance, but deep losses will burn through much of that cash before the company reaches cash flow positive, making any inclusion of cash in the equation a careless assessment.

The company guided fourth-quarter revenue to around $40 million, with most of the sequential revenue gains coming from product and service categories providing no real financial benefit to the company.

Carry

The main investor takeaway is that Matterport has a promising business opportunity, but the company can’t generate the subscription growth needed to invest in the stock. Investors should continue to side-watch a return of stocks to $2 or so until signs exist for faster subscription growth to reduce operating losses.

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