As I put it on Dec. 27, Matterport (NASDAQ:MTTR) stock is at the mercy of the market.
However, I didn’t expect the market to have no mercy on Matterport. Since that date, the spatial data software provider has experienced another sharp drop in price.
Falling more than 50% from $24 to nearly $10 per share, you can blame much of this decline on the Federal Reserve and its rate hike plans. Higher rates means less justification for the frothy valuations growth plays have achieved during the pandemic era.
This sell-off has been intensified by the stampeding out of meme traders, who frankly bought this stock on its metaverse potential rather than on its fundamentals. Worse yet, both factors could carry on. This could send the former special purpose acquisition company (SPAC) to prices well below its initial offering price of $10.
Making a name for itself in a fast-growing industry, the company still has a lot of long-term potential. This platform, which enables the creation of 3D digital twins of buildings, stands to see wide adoption by the real estate industry. It’s not hard seeing this one day scaling into a multi-billion per year business.
But until the meme crew makes a full exit, and Matterport’s valuation falls down to a more reasonable level, sitting on the sidelines is the best move.
MTTR Stock and Its Epic Plunge
Matterport isn’t the only tech stock slammed hard by the prospect of higher interest rates. Scores of other names have been under considerable pressure, as investors cycle out of them. Given how much has come out from the Fed, it may seem like all of its cards on the table with regards to increased interest rates.
However, it’s too early to say that’s the case. Although considered a long-shot possibility, the central bank may enact a 0.5% rate hike rather than the 0.25% one currently expected, when it presumably raises rates in March. The Fed could also raise rates more than the three times already priced in for 2022.
This could put more pressure on tech stocks, including MTTR stock. The second factor, the rapid exit of the Reddit set, could also carry on in the months ahead. Although many from this investing cohort have already cashed out, chances are there are plenty that are still holding the bag.
After buying MTTR stock for $25, $30 or even perhaps $37.60 per share (its all-time high), these traders may be holding on in hopes of a rebound. But if one fails to arrive, they may wind up throwing the towel out of impatience.
Put simply, I believe there’s a strong chance Matterport crashes down to single-digit prices.
A Possible Buy If the Price is Right
In my coverage of MTTR stock, my main issue hasn’t been with its underlying business. Rather, it’s been with its valuation. Even at today’s prices, based on 2021 projections, shares trade for around 34.5x sales. Sure, this high valuation stems from projections of high annualized revenue growth (nearly 60%) in the coming years.
Yet as a Seeking Alpha commentator recently argued, Matterport’s revenue growth looks at risk of coming in far below expectations for 2021. Based on the commentator’s interpretation of guidance, revenue for the year is only set to grow by 28%. That’s nothing to sneeze at in terms of revenue growth.
Also, once Matterport completes its shift from a license-based to a SaaS-based business model, growth could reaccelerate. Still, until that’s confirmed, such a high P/S multiple isn’t sustainable. Even if it falls to a lower but high multiple (10x 2022 projections of $160.06 million), that implies another potential drop of around 50%.
The takeaway? It may be best to wait for MTTR stock to fall to mid-single digits before buying it as a bottom-fisher’s buy. Shares could make their way down to that price as rate hikes further contract valuation multiples. Depending how quickly those holding the bag give up, it may arrive down there sooner than expected.
Sit Tight For Now
Admittedly, it’s not guaranteed downward spiral tech stocks have found themselves lately will continue. Things could soon settle down, if it’s clear the Fed won’t do more to combat inflation beyond raising rates by 0.25% three times this year.
However, while this may lower the chances Matterport takes another 50% dive, it could still happen. If more skeptical commentators are correct, and its actual growth comes in well under estimates, then a move to a less premium valuation may be in store.
MTTR stock has potential to be a great long-term play, and not because of its perceived “metaverse” exposure. Just wait until it hits a more reasonable price before buying.
On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
