Matterport: Flush With Cash, Soon A Buy (NASDAQ:MTTR)

When does a pullback eventually stop? That’s the question I’ve been asking as Matterport (NASDAQ:MTTR) sinks further from all-time highs. The ticker is down 43% over the last year, with common shares that are currently trading hands at a 4.37x price-to-sales multiple. However, whilst this is down markedly from 24x at the start of 2022, it’s still 64% above an IT application software peer group median of 2.67x. The headwinds being faced by the company are intense with a Fed funds rate sitting at a 22-year high of 5.25% to 5.50% catalyzing total disruption of the US housing market. This has now seen home purchases scrapped at the highest rate in 10 months, with almost 60,000 home-purchase agreements canceled in August, around 15.7% of homes that went under contract.

This disruption to the residential housing market is important as Matterport derives so much of its sales from real estate agents using its technology stack, consisting of 3D cameras and software, to capture physical building spaces to aid the sales lead process by creating virtual spaces of homes up for sale. However, the pullback of the common shares has come against a push by the company to preserve liquidity against capital markets that have become brutally Darwinistic for loss-making upstarts. Matterport held cash and equivalents of $445.6 million as of the end of its fiscal 2023 second quarter, down from $476.2 million in the year-ago comp but currently forming 63% of its $708 million market cap and generating $1.48 million in interest income during the quarter.

Services And Subscription Revenue Move Up

Matterport is actually performing well. The company brought in revenue of $39.6 million for its second quarter, up 39% over its-year-ago comp and a beat by $330,000 on consensus estimates. Growth was driven by services revenue, which jumped by 113% from its year-ago comp to reach $10.68 million, around 27% of total revenue. This segment consists of Matterport’s professional services that enable businesses to tap into its expertise to create digital twins. Subscription revenue grew by 13.5% year-over-year to reach $20.87 million with Matterport seeing its subscriber base expanding to 827,000 and with spaces under management hitting 10.5 million, up 34% year-over-year.

Hence, Matterport’s price-to-sales multiple has to be viewed through the lens of its subscription business, which saw its subscriber base grow by 34% year-over-year with its annualized recurring revenue (“ARR”) exiting the second quarter at $83.5 million. This is big as prior to the pandemic SaaS style revenues came with a roughly 7x to 12x revenue multiple. To be clear, Matterport’s ARR alone would have likely seen its market cap at just north of $1 billion if the ticker was trading under 2019 conditions. The marked rise in the Fed funds rate has completely changed the underlying sentiment of the stock market, turning investors away from loss-making tickers.

This great cloud over investor sentiment is set to remain sticky on the back of the Fed’s higher for longer mantra. Profitability is in view for Matterport with the company accelerating its operational cash flow profitability target to 2024, a full year ahead of its prior target. Cash used in operation activities was $12.4 million during the second quarter, a 62% improvement from $32.8 million in the year-ago comp. Matterport’s non-GAAP loss per share, of $0.07, also improved by more than 40% from its year-ago figure.

When Is The Ticker A Buy?

Matterport is currently still in growth mode as it chases operating efficiency, with the company reducing its workforce by about 30% in July. However, we’re still quite a way from profitability, especially on a GAAP basis. Matterport strips out stock based compensation for its non-GAAP loss figure, and this came in at $63.25 million for the last two quarters. Bears could argue that the company’s stock based compensation at what’s roughly 9% of its current market cap for the first half of 2023 seems excessive. The company is well on track for stock based compensation that’s 18% of its market cap in a single year, it has so far shed a marked amount of its value. Shareholders would likely want to see some more restraint on this front, even with the progress being made with cash flows.

The company’s gross profit margin has also been in decline, with this figure at around 38.67% for its second quarter, as services revenue grows as a percent of total revenue. Gross margins might increase from the upcoming third quarter, with Matterport bringing in a 7% to 11% increase in its standard subscription plans, which management stated was well received by its customers. I’m not a buyer here yet though, but this is a hold as a dovish Fed pivot combined with cash flow breakeven might be enough to spark a recovery in the stock.