Matterport Stock: A Cautious Hold With Limited Upside Before Acquisition

seekingalpha09-13

Matterport's stock has surged due to AI features and a $5.50 per share acquisition offer by CoStar Group, despite ongoing unprofitability.The company excels in 3D spatial mapping and digital twin ...

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Wirestock Shares of 3D spatial mapping firm Matterport (NASDAQ:MTTR) have surged over the past year. The stock is up more than 62% year-to-date (YTD), crushing the S&P 500’s 15% gain over the same period. Much of Matterport’s stock’s momentum stems from excitement over its AI-powered features and its pending acquisition by CoStar Group (NASDAQ:CSGP). The $5.50 per share offer represents a sizeable premium over current prices, which makes it an appealing exit for existing investors. However, across various growth and discount rate scenarios, MTTR stock appears disconnected from its underlying fundamentals. For now, MTTR stock remains a cautious hold. Given the buy-out offer’s significant premium over current prices, and considering the transaction has been approved already, it's unlikely to see a major decline before the acquisition is wrapped up. At the same time, with no major catalysts on the horizon to push the price higher, MTTR stock is likely to remain range bound near its offer price. What Does Matterport Do? Matterport is a small-cap business sporting a $1.33 billion market cap, which has established its place as one of the top players in spatial data and digital twin technology. Offering products like the Pro3 and Pro2 3D cameras and services like smartphone capture, it continues driving digitization across real estate, construction, insurance, and other related segments. Headquartered in Sunnyvale, CA, the firm has a strong global presence with operations spanning upwards of 150 countries and partnerships with multiple Fortune 500 companies. The original snapshot from Matterport's pitch deck offers a glimpse into its massive customer base, though naturally outdated. Matterport Pitch Deck Global Partners (Bestpitch.com) Another snapshot from its pitch deck highlights the massive potential in digitizing the global building stock, valued at $230 trillion at the time. Matterport looks to solve multiple pain points by addressing inefficiencies and underutilization of these assets facilitating digital transformation of the built environment. Matterport Pitch Deck Value Proposition (Bestpitch.com) Matterport's current moat is based around its easy-to-use 3D tours and models, which attract a ton of competition with fewer barriers to entry. Companies such as Realsee, Cupix, Metareal, and 3DVista have all developed their own models offering smooth location transitions, dollhouse views, and flexible pricing models. On top of that, the firm’s focus on real estate further weighs down its competitive advantages, with multiple competitors in that space, while others, including Leica and Zillow (NASDAQ:Z), tapping into advanced technologies such as LiDAR, offering even more sophisticated spatial insights. Hence, a lot of Matterport’s long-term bull case hinges on its investments in AI and expanding its enterprise-level services beyond real estate. Its AI-powered offerings, such as Genesis AI, can effectively automate tasks, including interior design, space planning, and property management. It adds to the utility of Matterport's digital twin platform, saving users time and costs, while continuing to bolster its subscriber base, which recently eclipsed the one million mark. Revenue Growth Holds Strong, But Profitability Remains Elusive. Matterport’s recent results highlight resilience in its top-line expansion, driven by subscription growth, but profitability remains out of reach at this point. Despite the headwinds, Matterport returned to positive single-digit revenue growth over the past couple of quarters. Though it missed revenue estimates, the firm still posted solid year-over-year (YoY) growth of 6.7% and 4.9% in the second and first quarters, respectively. The second quarter (Q2) was impressive, with Matterport hitting new milestones with Annualized Recurring Revenue (ARR) surging to a record $96.6 million, up 16% YoY. Subscriber growth soared by 28% to 1.06 million, while the total square footage under management shot up by 33%, hitting 44 billion square feet. Matterport Q1 Earnings Deck (Investor Relations Matterport) Naturally, the quarter’s highlight was another impressive double-digit surge in subscriber growth. The firm’s subscriber growth has been steady, as seen from the snapshot of its Q1 earnings presentation. Total subscribers blew past the one million mark earlier this year and have been a core driver of company sales, supported by the rise in net dollar expansion rates, reflecting the growing value extracted from existing customers. Despite the resiliency, Matterport’s recent revenue growth pales in comparison to its impressive past, where it averaged nearly 30% over the past five years. Naturally, the current slowdown is linked to heightened interest rates and the economic uncertainty over the past year. The U.S. real estate saw profit margins on single-family home and condo sales drop to a worrying 55.3%, the lowest it has been in over two years. Also, median home prices took a hit, dropping 4.3% quarter-over-quarter (QoQ) to $330,000, one of the steepest declines in the past 10 years. Furthermore, profitability remains a major concern for the business, as it continues to post negative quarterly earnings. What’s most surprising is that, despite rapid subscription sales growth, Matterport’s gross margins have dipped to 47.72% on a trailing-twelve-month (TTM) basis, marking an 810 basis point drop from its 2020 levels. A similar trend can be seen in Matterport’s net income margin, which has plunged to -164%, sharply in contrast to the -16% recorded four years ago. Cost of revenues now account for 52.3%, compared to around 44% in 2020. Moreover, its operational expenses have ballooned to over 150% of total sales, a monstrous increase from just 70% in 2020. Earnings Estimates (Seeking Alpha) As we look ahead, it’s unlikely to break-even over the next couple of years based on analyst estimates. Analysts project EPS estimates of a negative seven cents for 2024 and a negative three cents for 2025, pointing to ongoing losses. Insider Sales Signal a Concerning Trend Insider trading activity at Matterport of late raises some major red flags for its shareholders. Matterport Insider Buys and Sell Volumes (GuruFocus)Matterport Insider Trades (GuruFocus) The charts above show that insider sales have significantly outpaced insider buys, with notable volume in the past 6 to 12 months. In total, a whopping 11 million shares were sold-off over the past three years, and just 210,000 shares were bought. Moreover, high-level executives, including the Chief Financial Officer (CFO), CEO, and Chief Accounting Officer (CAO), have offloaded substantial portions of their holdings. In the span of just a few days in early September, several top executives at Matterport sold major amounts of stock from their portfolios. CEO Raymond Pittman sold 223,526 shares on September 6, 2024, representing roughly 5.79% of his total holdings, primarily to cover taxes and fees. Additionally, CFO James Daniel Fay dropped 74,369 shares (4.82%) on the same day for the same purpose. Meanwhile, Chief Technology Officer (CTO) Tulsi Japjit and Chief Legal Officer (CLO) Matthew Zinn sold 53,005 and 52,634 shares on the same day. Though these sales occurred within a short time frame, they are usually typical for various personal and financial reasons, as seen above, and they do not always reflect the management's outlook on the company's future or the upcoming acquisition. Fair Value Estimates and Technicals Setup MTTR stock has enjoyed a powerful uptrend over the past year, but recent technicals point to a more range bound movement, with fair value estimates highlighting a growing disconnect from fundamentals. Matterport Stock Chart (TrendSpider) The chart above points to a clear downward trend leading into mid-2024, with the stock consistently making lower highs and lower lows. However, following the announcement in mid-April, the stock jumped from $1.74 to $4.80, a 175% one-day increase. Since then, though, the stock has been mostly range-bound and is facing sustained resistance near current levels marked by the flattening of the 9-period and 20-period exponential moving averages (EMAs). With the EMAs converging, the recent momentum is weakening, which could be a precursor to a trend change. Additionally, the relative strength index (RSI) at the bottom of the chart shows a recent bounce, but currently remains in the middle range (around 50-60). Hence, it indicates that the upward movement is potentially losing strength and more range bound activity to follow. Moreover, when it comes to its fair value computation, there’s a massive divergence from the current share price, even when using very gracious estimates. The analysis starts with a calculation of MTTR stock's beta, comparing daily returns to the S&P 500 over the past three years. With a beta value of 2.26, MTTR stock is more than two-times as volatile as the S&P 500, suggesting it experiences much larger price swings in response to market movements. This significantly high beta increases the company's weighted average cost of capital (WACC), as we can see from the snapshot below. It’s worth noting that Matterport carries virtually zero debt and no interest expenses, resulting in a 0% cost of debt. Regardless, we still end up with a remarkably high WACC of 15.39%. WACC Calculation (Authors Own Calculations) Taking into account average growth estimates and its forward estimates of around 22.5%, including Seeking Alpha’s forward projections, I applied this to MTTR’s operating cash flow per share, which is expected to break even next year. I factored in a generous 5% terminal value through 2034, another generous estimate. Fair Value Calculation (Authors Own Calculations) However, even based on those estimates, its fair value comes in at a measly $1.86, roughly 58% lower than its current price. Additionally, I conducted a sensitivity analysis, looking at various growth and discount rate scenarios. However, from the table below, we can see that until or unless its WACC improves, influenced heavily by its beta value and comes under the 6% to 8% mark, its price comfortably trails its current share price. As shown in the table below, unless Matterport’s WACC improves and falls within the 6% to 8% range, its fair value estimate will continue lagging behind its current share price. Sensitivity Analysis Calculation (Authors Own Calculations) Risks To The Thesis MTTR stock is a tricky stock to hold, and given the current market uncertainties, it's difficult to predict whether the stock will decline to its fair value. The volatile economic environment at this point adds an extra layer of risk, which makes it tough to gauge future performance. Moreover, the stock market’s been remarkably choppy of late, and while the U.S. economy has shown resilience, the recent lackluster jobs report complicates the narrative surrounding a soft landing. A potential delay in interest rate cuts could also play a major role in impacting the stock. Moreover, unforeseen risks such as regulatory hurdles or changes in market conditions could disrupt the CoStar deal. Therefore, investors must consider these factors before making their move. Takeaway On Matterport Stock With existing-home sales showing improvement in July and the potential of multiple interest rate cuts ahead, MTTR stock is likely to avoid dropping to its fair value ahead of the CoStar acquisition. The deal offers an excellent $5.50 per share buyout, offering an attractive premium over its current price of $4.37.  The current technicals and fair value assessment suggest the stock may remain range bound, which makes it imperative for investors to time their entries to capitalize on the acquisition deal carefully. For now, it remains imperative to closely monitor the stock's movement and see if it stabilizes around the offer price.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467991237"}