Matterport (NASDAQ:MTTR) stock is one of the few tech names that is still on a winning streak. The virtual tour/digital spaces company completed its special purpose acquisition company (SPAC) merger recently and shares have tripled from the opening $10 price.
MTTR stock has been a clear beneficiary of the recent trend toward metaverse stocks. The company is the first mover in the emerging field of putting real estate into a virtual reality setting. Given the increasing focus on making virtual and augmented reality a consumer product sooner than later, Matterport is in the right place at the right time.
A Fascinating Business Model
Matterport has a unique business. It provides companies and real estate landlords the ability to digitize their properties. Matterport’s 3D cameras and associated software package create a lifelike representation of interior spaces.
What to do with this? For example, a hotel can provide potential guests with a 3D tour of the property before they make their reservation. That’s already cool with today’s technology, and will get even more powerful as consumers gain access to virtual reality systems to make these tours even more immersive.
It’s not just hotels. Office buildings can show potential tenants the space without anyone having to drive across town or put themselves at risk of contracting Covid-19. For another, retail store owners can play with the layouts of their shops in a 3D model, thus trying out different configurations of their space without having to disrupt the existing real-world store while they’re tinkering.
Improving Monetization With MTTR Stock
Matterport has a few ways of earning money from its services. One is a traditional marketplace. Companies post their Matterport-enabled digital spaces online and if clients end up buying some service through the listing, Matterport gets a piece of the action. Matterport also has an app store with additional features for the virtual tours, such as interior floorplans, that improve the revenue per user.
The company also has a licensing business. Traditionally, this was a one-time revenue deal. Now, however, the company is transitioning to a subscription-based model. This will cause revenues to likely be light for the next couple of quarters as subscriptions pay much less than one-time licenses up-front. Over time, however, subscription models tend to generate more consistent revenue, and thus should serve as a tailwind for Matterport from the back half of 2022 onward as the subscriptions take off.
Matterport has some other revenue streams as well. The largest of these is hardware, as it gets money for its cameras as well. The company may be able to juice revenues when it sells new and higher-quality versions of its cameras. However, as tech investors know, the profit margins come from the value-added services; the hardware is a low-margin piece of the equation.
Valuation Is Out Of Whack With The Company
There’s a difference between a great company and a great investment. As we’ve seen over the past few months, a ton of growth companies are in steep decline. This isn’t so much because the business changed but rather because valuations have moved to the forefront.
Through about March of this year, as long as a company showed strong and accelerating revenue growth, the stock price would go up. It was really that simple. Now, though, investors are being far more demanding. So many old pandemic winners have utterly imploded over the past six months as people reconsider whether 25, 35, or even 50 times revenues really makes sense for a firm.
Matterport, with its recent run, is going for close to 80 times revenues. This is simply too steep in such a difficult market for growth companies that aren’t profitable. And it gets even more complicated, as Matterport has a bit of a lumpy revenue outlook right now which could lead to soft results. A lot of the things that will drive improved revenues, such as the subscription model, won’t really kick in until the back half of 2022. Thus, don’t expect magic in the next quarter or two.
MTTR Stock Verdict
I’m a fan of the metaverse. Mark Zuckerberg doesn’t get enough respect; he’s a proven capital allocator and there’s a good chance he’ll make something amazing happen with this new field. Bet against the metaverse at your own peril.
Still, everything has a price. I recently sold my position in fellow metaverse play Unity Software (NYSE:U) given its huge run-up on the metaverse excitement. Just over the past couple of weeks, U stock has pulled back from $200 to $150. I fear that Matterport may see a similar short-term trajectory once the current metaverse hype dies down a little.
It’s hard to overstate how bad sentiment is for most software and growth stocks right now. Matterport, as a former SPAC, has another black mark against it as well. With those factors in mind, it simply isn’t prudent to chase the stock up here at $30. Give this some time, there’s a ton to love about the Matterport story but the price just isn’t worth it right now.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.