Matterport (MTTR) is a company I know a lot about from sitting on the other side of every fence around Matterport. I’ve been a consumer, a customer, a partner-supplier and even worked in a competing firm to MTTR. But I’ve never been an investor. Nor have I ever found a reason to love the tech.
Matterport’s Financial Health: Not Great, Not Terrible
In all honesty, I didn’t set out to write this article with any intent to put focus into a thorough review of Matterport’s financials, but I feel given this growth firm is trading at 22X sales, there needs to be at least a short review to assess.
There’s not a lot of excitement in the MTTR cash flow statement, leading with a $168m net income loss, and cash flows from operating activities + investing activities of $-487.2m. Matterport is burning up cash fast, to fuel its rapid growth.
MTTR’s balance sheet is a brighter picture, with no debt on the books, and having secured funds through the recent SPAC merger to secure the firm’s future after going public.
There are few current liabilities to weigh down the firm, however, there is a large earn-out liability of some $335m that will bring a future headache to the firm.
Michael Wiggins De Oliveira calculates that MTTR has a negative free cashflow margin of 31%, burning some $26m in cash in its most recent quarterly earnings.
And as for growth itself, revenue growth doesn’t seem to be setting the world on fire, and estimates were recently revised down after an earnings miss. As a growth firm, investors would be relatively disappointed by the below quarterly revenue chart, given the EV/Sales ratio of 22X.
But as much as these numbers don’t impress me, my biggest concern is only partially visible in the firm’s financials. In my eyes, the poor financial results are a side-effect of what I see as MTTR’s many challenges.
The Catalyst: COVID-19 Was MTTR’s Big Opportunity. Instead, It Was A Big Miss.
With the onset of the Coronavirus, the real estate sector saw immense changes in both the market and consumer behaviour.
The Australian Financial Review wrote a piece in August titled “Pandemic fuels broadest global house price boom in two decades”:
Of the 40 countries covered by OECD data, just three experienced real-terms house price falls in the first three months of this year – the smallest proportion since the data series began in 2000.
The AFR piece highlighted a nearly 9% OECD house price growth, as buyers were spurred on by low-interest rates and a desire to move into a bigger space after COVID meant long hours spent cramped at home during lockdowns, paired with record-high savings rates in many households.
Meanwhile, consumers longing for a change to their living environment turned to the internet in record numbers to search for properties due to a combination of limited movement (due to lockdowns), anxieties around attending open inspections and often looking to move a long distance from their current address.
Agents everywhere commented how they were overrun with offers from crowds of buyers competing to secure a property at any price.
In many countries, governments at local, state and federal levels imposed restrictions on certain real estate activities, such as banning or limiting open inspections and auctions. But that didn’t stop the buyers who went after homes in droves who just moved their buying activity online.
The same restrictions impacted the construction and maintenance industries, rounding out 3 of Matterport’s biggest client industries, where property inspections of various types were still necessary despite not being able to attend onsite.
COVID-19 related restrictions should have given rise to one of the biggest growth periods in MTTR’s history. But it didn’t. Why?
The Real Estate Industry Looked Elsewhere
There are countless virtual tour services, techs and providers available for real estate agents across the globe (seriously, just Google “virtual tour for real estate” and you’ll find 5m+ results, with a never-ending supply of different providers competing for business, while YouTube is full of how-to DIY videos).
The main challenges for Matterport are cost, quality and user experience. And often, a combination of all three at once.
The Cost Challenge
Speaking from my own experience in the industry, real estate agents loathe a subscription service. The concern is that their own commissions are lumpy, unreliable and many agents spend months living on a limited budget between commissions.
What agents particularly find troublesome is the limiting number of virtual tours they’re allowed to have active at any given time with the Matterport subscriptions. Listing volumes are seasonal and often hard to predict on an agent-to-agent level (and even office branch or regional basis). So picking a plan presents a headache for individual agents trying to predict what their needs will be in the future.
(Yes, there is a “freemium” version, however, this is designed for private use and not a good solution for the real estate sector. Conversions to paid accounts sit at around 14%, with 353k free users and 51k subscribing users in 2021)
I hear the wiser individuals in the crowd rebut me: “But the agent could just use an outsource supplier to capture the space, and use their subscription!”
Yes, but outsourcing Matterport tour creation is costly, and not available everywhere. Matterport advertises fees between $129 and $400 for small homes, up to $1,000 for large homes using their network of providers.
Costs for these tours can vary wildly for suppliers outside of the official Matterport network as well, who operate to fill the gaps where Matterport doesn’t have coverage.
These are costs agents aren’t keen on footing the bill for.
If you compare these costs to competitor techs, Matterport is extremely expensive. That Google search for “virtual tour for real estate” you did earlier, did you look at the costs of tours?
You will find relatively polished and real estate specific virtual tour technology available for as little as $18 per property. And you can even find plenty of free solutions around with almost no effort.
Yes, I’m aware these aren’t EXACTLY like the Matterport tech, and that MTTR’s tech is unique. But is it really? Because Matterport has been slowly chipping away at the moat it had around product quality, aiming to grow by making the tech more accessible. Let’s explore that.
The Quality Challenge
For a long time, Matterport tours were unmatched in terms of quality of image, thanks to their specialised camera equipment that output better quality images than any other 360 camera technology available at the time for a similar price ($2,000-$3,000 per camera, and some retailers offering the tech for up to $5,000 in overseas markets).
In late 2019, Matterport announced it was opening its tech to allow third-party cameras (starting with the vastly inferior Ricoh Theta 360 camera) to provide imagery for the Matterport platform.
I recall seeing reactions to the news in real-time from within Matterport User Groups on Facebook, with irate owners of the Matterport camera up in arms that their sophisticated $2,000 device that had exclusive access to the MTTR platform, was now entirely replaceable by a $500 pocket-sized stills camera.
I still remember one particular “Capture Technician” posting a photo of his Matterport camera thrown in a dumpster, as he voiced his anger at what he felt like was a betrayal by Matterport.
While the high-end quality tours are still very much available (at a cost), Matterport has continued to open its platform up to lower and lower quality input devices, and have recently opened up to smartphone users (Imagine the reaction of Matterport camera owners on that news).
Where high quality was once the firm’s strongest moat, MTTR now finds itself “wrestling in the mud” with its low-budget competitors, with no discounts offered to customers for using lower-quality inputs on the MTTR platform.
From a client perspective, if the quality of input imagery is allowed to be so low, why use the platform at all when you pay the same subscription fees as the high end tours?
Speaking of the platform, we next need to look at a more nuanced challenge facing Matterport: The end user experience.
The User Experience Challenge
Matterport tours are detailed and thorough by nature, covering every inch of the space it’s capturing. But this also creates a unique level of complexity.
If you’ve never used a Matterport tour before, try one out for yourself (See example here).
Some of you may find them relatively intuitive if you have experienced them before, while older generations or first-time users will find themselves facing a steep learning curve.
Consumer feedback I’ve frequently come across over the years includes frustrations with navigating the space using the “spots”, motion sickness from the transition from space to space, difficulty viewing areas in a home because it’s too slow to move around, getting “stuck in a corner and not able to get out”, and general UI issues with experiencing the home in a meaningful way.
Matterport has never released its average user time spent in a virtual tour, but I expect that the numbers may not be particularly impressive for real estate listings, as frustrated users simply click to exit.
Competitor products like panorama tours are extremely varied in their user interface layouts and ease of navigating a property. Many have opted for a much simpler interface, featuring fewer “spots” to view in a home allowing users to see just the spaces that matter to them, and not get bogged down trying to traverse a hallway to get from one room to the next.
Combine the issues of cost challenge, quality challenge and the user experience challenge, you can begin to see how these issues were magnified during COVID and contributed to poor growth results during the most opportunistic market Matterport will ever experience.
The Macro View: A Look At The Broader Industry
Matterport highlights in its most recent investor presentation that they have addressed less than 0.1% of the total addressable real estate market. Regardless of whether the broader real estate industry does or doesn’t grow, MTTR still has the whole world ahead of them.
However this view doesn’t consider what % of the total addressable market MTTR’s competitors have been able to capture already. I have no idea where one would even find the data for Matterport’s competitors as a whole given how disaggregated the virtual tour market is.
Matterport may point to its tech’s wide variety of applications and suitability across the retail industry, building and construction, real estate sales, facilities management and more recently the public sector. However, many of these thousands of competitors have all entered this space as well. There exists no moat for Matterport in any of these markets to say it has the unique tech that no other provider could offer.
Metaverse As An Opportunity? Probably Not.
In all honesty, I have absolutely no understanding of the Metaverse, the size of the opportunity or even how the Matterport tech could be utilised here.
I imagine the Matterport camera’s structured light (infrared) 3D sensor would produce scans of spaces that could be converted to a usable format in the Metaverse, which in turn creates a market for creating spaces in the digital world.
Again, there are numerous competitor techs available already, including in smartphones with LiDAR tech. So that rules out the hardware as being a driver of opportunity.
I can’t imagine how the Matterport software is therefore the opportunity for a Metaverse solution, as once again there will be countless other competitors entering the space quickly with purpose-built software for creating the Metaverse in, and quite probably cheaper.
Upside Risks & Contrary Opinions
Reviewing SA authors who are bullish on the stock, they all put a lot of focus on the Metaverse opportunity for MTTR. Granted, an officially recognised partnership with Facebook / Meta Platforms (FB) is huge news, but official press releases are vague on what the opportunity will mean as a service that could be monetized.
MTTR VP of Business Development and Alliances, Conway Chen, said:
We are excited to collaborate with Facebook as we provide the academic and research communities access to this unique spatial dataset that is sure to impact how we work and live. With more than five million spaces captured with the Matterport platform, we are the only company that can offer a diverse library of high-resolution, data-rich digital twins of various styles, sizes, and complexities from across the world. HM3D can also be used more broadly by academia, and we can’t wait to see what innovations emerge. (MTTR)
This could very well be a breakthrough for MTTR, but I would view this as a pivot for the firm that has built its core business on digitizing real-world assets for inspection, rather than interaction.
MTTR’s financials don’t give any particularly concerning red flags for the firms continued operations in the next 5 years. Gross margins are excellent, and while cash burn is high, spending has been focused on growth (while more recently an increased spend on R&D). There will probably be a capital raise in the next 2 to 3 years to continue to fund operations which will dilute shareholder value, however, the continued operation of MTTR is certainly not under threat, and therefore the firm has the opportunity to continue to grow and reach profitability.
The Investment View: Don’t Count On The Promised Land Of The Metaverse Just Yet
I believe finding an accurate valuation on Matterport would be almost impossible given the big headlines around Metaverse and uncertainty over what that means for the firms’ future financial success.
If I look only at financial results and valuations of peers, a 5X revenues valuation (the Application Software Stocks industry has an average Price/Sales ratio of 6.49 for firms between $1.5b and $2.5b) would see the current price of ~$10 is fair given the low level of growth experienced by the firm, with a safe likelihood of short to medium term continued operations and longer-term future profitability.
However I see real concerns with the issues listed above around product costs, quality and experience as barriers to MTTR’s growth, given the opportunity of a restricted COVID real estate environment has largely passed. MTTR essentially missed its chance at what could have been a supercharged growth.
With that in mind, I’m bearish on the stock, and can’t see how investors could count on with any certainty the Metaverse opportunity providing any impactful revenue results in the next 2 to 3 years.
The firm also faces a large volume of short interest of 7.34%, indicating investors believe the firm has a way to fall yet.
Price to Book of 12.3 is more than double that of the $1.5b – $2.5b application software industry (average P/B ratio of 5.2), so an industry average P/B would give MTTR a value of $4.41.
I believe investors should see value in MTTR anywhere from $4.41 (-57% downside) up to $7.63 (P/B of 9, -26% downside).
Conclusion
MTTR missed a huge opportunity to showcase its ability in operating as a growth firm and capitalise on a market that needed virtual tours to continue operating. This has to be a red flag in the eyes of investors, and headlines about working with Meta Platforms are nice, but the opportunity is a pivot away from the core business that could prove to be a costly distraction from continuing the firm’s goal of digitising the built environs world.