Description

Matterport (Short)

Matterport is a 3D imaging software provider. Matterport enables you to create 3D renderings and is particularly popular in real estate. Here is an example of a 3D tour on Redfin powered by Matterport. Roughly ⅔ of revenue comes from real estate (residential and commercial) with the remaining coming from more industrial / construction use cases. Matterport is a retail favorite and a bit of a meme stock on recent metaverse mania. The company aims to create a “digital twin” for every building, though it’s not clear how the company will monetize 3D images of office space in any future metaverse. This is a story stock with retail enthusiasm. It is also a SPAC trading for 135x ARR who just reduced their guidance and missed their quarter. Matterport has >80% downside heading into their next earnings and lock-up expiration.   

Company History

The company was founded in 2011 by David Gausebeck, a deeply technical former PayPal engineer. The company was predominantly a hardware company for most of its life. Matterport sells a ~$3k camera that takes these photos and then stitches together the 3D image. In May of 2020, Matterport released Matterport for iPhone to enable iPhone 12 users to create 3D renderings with their phone. In October 2021, they released the same functionality for Android. Download data for both of these applications are underwhelming. It also calls into question Matterport’s moat -- if I can do everything on my iPhone, how defensible is Matterport’s “AI engine” that stitches together the 3D rendering? 

Bill Brown served as CEO from 2013-2018 before giving way to RJ Pittman, the then Chief Product Officer of eBay. Pittman began focusing the company more on software rather than hardware. Checks on CEO and new management seem broadly good. The push to get the technology available on Apple and Android was meant to drive broad adoption, particularly amongst real estate agents who may not want to purchase a $3k camera or hire a specialist who owns one. 

Business Model

There are several benefits of 3D rendering and creating “Digital Twins”. The most obvious is residential real estate and the ability for potential tenants to get a better sense of the home. There are enough anecdotes to suggest that adding 3D renderings to listings makes homes sell faster and for more. However, this is simply not a large market.

In the US, there are roughly 5M homes transacted per year and ~20M rental units. If we generously assume that the average listing period for each is 4 months, and that the average rental apartment turns over every 2 years, we can assume that there are:

• 5M * (4 months / 12 months) = 1.7M homes listable at a given time

• 20M rental units * 50% renting in a given year * (4 months / 12 months) = 3.3M rentable, listable units at a given time

This results in a TAM of 5M residential units. 

The second biggest opportunity is commercial real estate. 3D renderings help commercial real estate owners attract tenants and potentially deal with insurers. It’s not entirely clear why every building would need a digital twin, but if you believe it does, then the TAM here is massive. 

There are other use cases -- particularly industrial and construction -- though those are essentially a different form of real estate. There’s also Airbnb / VRBO, though that seems to not be a large opportunity (more later). Regardless, the company does not clearly articulate the ROI.  Customer case studies focus on real estate leads, optimization, and other workplace training. 

Recently, including yesterday at the Wells Fargo conference, CEO RJ Pittman talked about the metaverse and NFTs. Any business with 10 different strategies has no strategies; this is a novel technology that gets the imagination going, but it’s a toy. 

The company makes revenue through 4 channels:

• Hardware: This is their ~$3k camera that stitches together the 3D rendering. Based on ~$33M in annual revenue with minimal growth, I estimate they sell 10 - 15k cameras per year.  

• Software (subscription): This is their monthly fee to host the 3D rendering. You pay per “active” space. 

• For example, if you are a real estate agent, you may sell 30 homes in a given year but only 10 or so at a given time. If you scan all of these homes, and deactivate the 3D rendering once the unit is sold, you will only have ~10 active spaces at any given time

• License: This is a very small stream of revenue for customers to host their own renderings. Very small, going to zero over time. 

• Services: This is a Professional Services org, including photographers with cameras to map buildings. Bulls will say there is a whole Uber-esque Matterport economy and all Matterport needs to do is take a small cut. This seems unlikely, as job pairing sites like Upwork and Angi are questionable business models themselves with a much wider range of offerings.

Obviously the value lies in the software -- the hardware and services are low/no margin businesses intended to drive subscription revenue. 

In the image below, you can see that pricing ranges from free to $2 - 3 / mo. 

The company is focused on growing “Spaces Under Management” as they view adoption more important than pricing. Revenue is obviously Spaces * Cost per space per month. 

All accounts indicate that the product is either underpriced or not that valuable. $1-$3 / mo is not demanding. The company does cite a 4B building TAM as they believe every building will have an eventual “Digital Twin”. 

Even post-COVID, the company has low adoption in its core markets. You cannot filter for 3D tours on Airbnb (as you can on Redfin) so it doesn’t seem to be an especially popular concept amongst hosts. On VRBO, I estimate that 3D tour penetration is maybe 5% (looking at unfiltered results vs. filtered on “Virtual Tours”), though many listings use. Vacasa does use Matterport for nearly 90% of their 30k properties, though that is at most $700k - $800k per year of subscription revenue and likely less. 

Here is a listing using Matterport on Vacasa. Here is a 3D listing not using Matterport on VRBO. Zillow has its own 3D Capture product, though some properties do show a Matterport rendering. Either way, 3D is not heavily penetrated on Zillow. You could argue this is the expansion opportunity, or you could argue that if behavior hasn’t changed post-COVID then it may never change.

The first image below shows a search for units in the NYC area for $1M - $4M. The second search is the same but filters for “Must have a 3D tour”. 

Financings and SPAC

The company raised $48M at a $325M pre-money valuation in 2019 from Lux Capital, DCM, and Qualcomm Ventures. The company had previously raised $63M, bringing their private financing total to $111M. They announced a SPAC transaction with Alec Gores in February 2021 at an Enterprise Value of $2.3B, or 11.3x 2022 revenue or ~19x ‘22 subscription revenue which they forecasted to grow 83% in 2022. 

Former CEO Bill Brown is suing the company so that he can sell his shares and avoid the lock-up. 

So what’s the set-up?

Let’s start with the leading indicators and work our way down. Matterport now has 6.2M spaces under management, up a respectable 11% QoQ but below the growth of recent quarters. 

They are also growing Total Subscribers at a similar clip. They now have ~440k free and paid subscribers. The proportion of paid subs fell to 12% in Q3 on the back of the Android release (was 17% in Q4 2020). 

Subscribers are growing much faster than spaces (with the exception of Q3). This means that each subscriber is hosting fewer spaces, and therefore paying less. 

This is obviously a new freemium strategy in practice and much of the growth in spaces comes from people who are able to use their phone to host one space. Or maybe some of them now pay $10 / mo and get a few spaces. But it enables the company to point to a growing Spaces Under Management as proof of future growth. If you adjust for pricing to try to strip out the free spaces -- and say that the price per space per month stayed at the ~$1.12 from Q2/Q3 2020, you get the chart below that shows much slower growth in “Constant Pricing” spaces. 

It’s possible that the number of paid spaces declined or was flat QoQ. 

All this indicates that Matterport saw a COVID bump for real estate virtual touring, but the business has fallen off a cliff. They are disguising that by pointing to growth in free users and talking up futuristic business models. 

Q3 Results

Matterport’s February SPAC presentation forecasted $123M in 2021 revenue and $202.5M (64% growth) in 2022. On August 11th, they issued guidance that called for 2021 revenue from $120M - $126M, in-line with their SPAC presentation. On November 3rd, they reported Q3 results with revenue up 10% YoY, down sequentially, and subscription revenue up 2.6% QoQ. Gross profit was flat YoY while R&D more than doubled, as did SG&A. 

They took down 2021 guidance to $107M - $110M, implying 14% revenue growth in Q4 at the high-end of their range. They then indicated that they believe they can grow at 50% once the economy normalizes, implying $165M in 2022 revenue (~20% down from projections). 

Their commentary pointed to supply chain issues delaying camera sales, and a tight labor market challenging their services business. Both of those are leading indicators of subscription revenue, though management did say they “expect” subscription revenue to be up sequentially. However, the camera is still available for sale on Amazon for 35% off delivering within 1 week. I’m not sure if management is lying about this topic, but they don’t have a supply problem -- if somebody wants the camera, they will get it. 

I’m showing 30% subscription growth (perhaps generous). Either way, Q4 will almost certainly be their 6th straight quarter with subscription revenue between $10M and $17M. 

Valuation

There was confusion about the share count so the company clarified in their earnings presentation: 

The footnote in the bottom left represents dilutive securities that are currently all in the money. The 23.5M earn-out shares vest in equal amounts of 3.9M shares each at various prices ($13.00 / $15.50 / $18.00 / $20.50 / $23.00 / $25.50). 

This is a fully-diluted $8.5B enterprise value company trading at 135x ARR and 93x 2022 subscription revenue assuming they had the rough guidance they put out after just taking down their prior guidance. 

Summary

1. COVID beneficiary with cool technology still looking for clear customer value prop trading for 135x ARR with <20% growth

2. Recent SPAC who just missed their quarter and took down their guidance, but then climbed >20% in the subsequent 10 days and is still up >50% in the past month. 

3. Retail investing favorite due to the cool technology, the huge listed TAM (SPAC presentation talks about $240T of real estate value), Josh Brown pumping the stock on CNBC when it was in the teens

4. Volume way up on metaverse flows

1. The company has a “partnership” with Facebook to provide academic institutions with access to a database of mapped spaces. 

5. Number of shares available likely to increase in the coming months

1. Currently ~170M shares outstanding though float is much smaller, as is typical with SPACs

2. Warrants exercisable on Dec 15th

3. Lock-Up plus earn-out shares should hit the market in mid-to-late January, adding hundreds of millions of shares to the float

Catalyst

Warrants exercisable on Dec 15th

Lock-up expiring late Jan

Earnings likely to disappoint in early Feb