Matterport ($MTTR) is the world’s leading spatial data company specializing in digitizing physical spaces. They make it easy to create digital models of the real world and to share those spaces anywhere.
- Virtual tours of homes are common on sites such as Zillow and Airbnb, but Matterport are also seeing increased take-up for use cases such as remote insurance assessments, warehouse and factory monitoring and optimization, virtual tourism, and construction
- Founded in 2011, and SPAC’d in July 2021, currently trades at a market cap of $4.3B. Has over $600M cash. Not currently profitable and made a loss of $11.6M in 2020
- 52% of $29M Q2 revenues were from subscriptions – a SaaS-like high-margin business that is the main growth driver
- The company estimates a TAM of $240B. The justification for this is flimsy, but there is significant optionality, with many yet to be identified use cases as the ‘metaverse’ becomes more established. If Matterport become the standard for spatial data capture, this estimate may in fact prove to be conservative
- Working with over 50 platform partners to build solutions on top of Matterport spatial data, expanding their use cases beyond real estate into automation, construction, retail and other industries
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Transcript
Albert: Hi, this is Albert.
Luke: And this is Luke.
Albert: Today is Monday the 6th of September.
Luke: Welcome to the Telescope Investing podcast.
Intro
Luke: It’s been a month or two since we’ve looked at a hypergrowth stock, and I think it’s definitely time to go play around with one of those funny little companies again this week.
Albert: Yeah, the last one we looked at was Integral Ad Sciences about a month and a half ago, and another one has come to our attention that we’re quite interested in. And at the time of recording, neither you nor I have shares, and that company is called Matterport. And I’ve been looking at this and I think you have as well, and we’re considering this for our own portfolios, so why don’t we just do a deep dive and then we can share our personal conclusions at the end of the episode.
Luke: Yeah, absolutely. Let’s have a quick recap on how the hypergrowth portfolio is going though before we look at Matterport. I want to see the context is potentially dropping into.
Albert: Are you sure you want to do that, Luke, considering the results that we’ve had so far?
Luke: Yeah, let’s be honest and transparent about some of our woeful picks. So our first hypergrowth stock was CuriosityStream a couple of months ago. That’s not so bad, currently down 12%. And I think you and I have both got a position in CuriosityStream haven’t we?
Albert: Yeah, I’m not too worried about this one, actually. It’s down 12% but it’s a very small company in a very competitive market and it’s doing well. I think in the last earnings call, they announced some good numbers and they’re growing subscribers.
Luke: And that’s great if you’re tracking these companies. Actually, I’m not. I deliberately with these hypergrowth stocks end up buying a small piece and then just turning a blind eye to it. I’ll come back in five years and see what happened.
Albert: You are literally sticking your head in the sand and hoping for the best, are you?
Luke: I am. My head’s too busy looking at all the main allocations in my main portfolio. But let’s just touch on the other hypergrowths as well. We also invested in that medical scanning as a service company, Nanox Imaging. They’re down 35%.
Albert: Yeah, this is a bit of a punch in the face. I think we were hoping for this to go up after it received FDA approval for the single-source imaging device. And they’ve recently submitted an application for their multi-source imaging device, but unfortunately, the share pace hasn’t followed the good news.
Luke: Yeah, it’s surprising to me too. You’re right. The day that they announced they got FDA approval, I was sure we were going to see like a wild doubling, but that clearly hasn’t happened.
Albert: Maybe the recent trial of Elizabeth Holmes has reminded everybody of Theranos.
Luke: Perhaps, yeah. Uh, let’s see if they do prove to be a fraud. My fingers crossed for their multi-source application, maybe towards the end of this year.
Albert: And the third one we chose to invest in, at least you did, is Integral Ad Sciences or IAS. We’re pleased to report that after only a few weeks, it is up 33%.
Luke: Are you pleased about that? You didn’t buy in.
Albert: Well, obviously I’m not pleased about that because I didn’t buy in, but obviously, you are, Luke.
Luke: I am. I’m waving my fists at you. Yes, I have a win on the board.
As said at the time, I was going to look at the earnings reports and see how they were doing, and it seems like they’re doing well. I might actually buy this in the not too distant future.
You’re not going to do an Apple and fail to buy it because you’re waiting for a better entry price?
Albert: I have learned my lesson, Luke, at least I hope I have.
Luke: Well, let’s see if we can convince each other to buy Matterport by the end of today’s episode, and hopefully, that’s another future win on the board.
Albert: Before we end this section, I’d like to mention the one that got away, Trupanion. We talked about this stock a few months ago and we decided not to buy. And shortly after, we were disappointed with that decision because we saw that the stock was up 25%, but currently is down 6% from when we looked into it.
Luke: That’s rough. That’s, uh, that’s interesting that they’re back in the hole again. I’m not going to have schadenfreude. I’d like to see them succeed. They’re a nice little business but perhaps I’m glad we don’t have a piece.
Albert: Well, we do have pieces of CuriosityStream and Nanox Imaging, so there you go.
Matterport
Luke: Well, let’s get into Matterport. See if we can convince ourselves to add this one to the roster and perhaps have another win on the board in the future.
Albert: Well, as a background, let’s talk about what Matterport actually do. Matterport is the world’s leading spatial data company, specializing in digitizing physical spaces. In simple terms, what that means is that they make it easy to create digital models of real-world spaces and then to share those spaces anywhere.
Luke: And let’s make it really easy, right? What do they really do? They’ve got hardware and software that lets you create a 3d image of any space. Might be your home, might be an office building, might be a factory or a production line, and then you can go and visit that space in virtual reality and interact with it in different ways.
Albert: I think that’s the way that most people I’ve seen this technology. And you may have seen these 3d virtual tours from real estate agents for properties to have for sale, and many of these were created with Matterport. But these digital models have uses beyond real estate. And as you said, they could include retail, construction, design, hospitality, and maybe travel.
Luke: And I think perhaps a ton of other things that just haven’t occurred to the company today. There’s a lot of interesting optionality on this one that we’ll get to a bit later.
Albert: This is quite a new company. It was founded in 2011 in California, and it just recently came to the public markets via a SPAC in July this year. I think on the first day of trading, their share price was around $14 and is currently trading at just under $18, so not a big difference.
Luke: Yeah, exactly. It definitely feels like we’re getting in at the start of the public journey. Well, let’s just quickly reflect on our hypergrowth criteria and see how it stacks up and why we’ve chosen to take a look at it this week.
Albert: Yeah, the market cap is currently around $4.3 billion, and our criteria was for a company that is under 3 billion in market cap, so it doesn’t quite meet that, but I think it’s close enough.
Luke: We also look for at least 10% quarter-over-quarter growth for the last three quarters. We’re looking for companies that have high growth in either customers or revenues. Well, Matterport’s latest quarter total revenue was 21% higher than the same quarter the previous year and up 10% from Q1, so that hits the criteria.
Albert: And looking at insider ownership, we want to see companies that have over 10% of insider ownership so that leadership’s interests are aligned with shareholders. And we saw one report that said 29% of Matterport is owned by insiders, and the largest shareholder is an early investor, a guy called Peter Hebert from Lux Capital, who sits on the board at Matterport and owns 21% of the shares.
Luke: And then our final hypergrowth criteria is that penetration into their total addressable market. So, we look for companies where their revenue is less than 10% of the TAM, which means they have lots of runway and room to grow. Well, this is a bit of a weird one. I’m really befuddled by the TAM of Matterport, and we’ll drill into it a bit later in the episode. But if you buy into the TAM vision, then they have virtually no penetration today compared to where they could get to, less than 0.1%.
Albert: Yeah, that’s a huge runway to go.
Luke: But it could be complete nonsense. It’s very hard to pin down. Let’s see.
Tailwinds
Albert: Let’s see when we get to that section, Luke. First of all, let’s talk about tailwinds. What are the tailwinds that are driving this technology and its use going forward? As you mentioned earlier, one of his main uses currently is in real estate, creating these virtual tours of homes so that you can see them before you buy them. And you can see these on property sites such as Zillow and also on rental sites such as Airbnb. And of course, we’ve seen a huge rise in this during Covid when people couldn’t go out, but 3d virtual tours has been shown to help to sell homes quicker and for a higher price than if you didn’t have the 3d tour. Not that this matters much at the moment in the current red hot property market in the US.
Luke: Yeah. Yeah. You’re right. Red hot. I was reading recently that it’s now standard practice to submit an offer letter, kind of a begging letter as to why my bid should be successful, that you send to the seller.
Albert: I’ve read some crazy stories. I think I saw a story where the buyer offered to name their baby after the seller if they went with them.
Luke: It’s pretty woeful when it comes to that, it’s like Rumpelstiltskin.
So, that’s residential homes, but they’ve got a ton of other use cases in other industries. I saw a quite interesting one in Matterport’s own investor relations material. They talked about an example of a company called ATI Restoration, who’ve invested in their own Matterport capability to capture scans of sites that need an insurance inspection. So basically these insurance estimators no longer need to go and visit a site now where there’s been some sort of disaster or there’s an insurance claim, and they just sent a Matterport technician instead. That guy captures the scan and the inspector can go and visit the site in VR and then conduct their inspection and provide their opinion on what the insurance claim should be.
Albert: And I guess that links in with the next tailwind, which is the work-from-anywhere economy. As you said, once these physical spaces are digitized, it allows people to work on them without being onsite and they could be in a different city or even country.
Luke: And it also ties in with our tailwind of virtual reality and augmented reality. Like, if you’ve now suddenly got these scans of your production line in your factory or your construction environment, it allows you to integrate the real world with the online world through digital twins. So you can start to do quite interesting things in terms of controlling or monitoring what’s going on in your work environment.
Albert: Yeah. I saw that Matterport used the term ‘digital twins’ quite a lot in their marketing material. But another potential tailwind that is emerging is that of virtual travel. It may have been accelerated again by the travel restrictions caused by the pandemic, but virtual tourism is starting and could explode as VR headsets become mainstream in people’s homes. They’re already virtual tours using live video on many sites, including Airbnb and other travel sites, but with VR, there could be even more immersive.
Luke: If I’m honest, that’s the only thing I use my own Oculus for these days, to go fire up a location in Google Earth and visit it in VR before I vacation there. I tried to do that, actually, before I go on holiday most times – go and visit a place, get a sky view, walked the streets, and just get a sense of the lay of the land.
You know, I was actually astounded last year when I was having a bit of a nostalgic moment in the middle of the pandemic and I revisited a couple of the places I’ve lived. And I was walking the streets of Hong Kong in VR in my Oculus and I bumped into myself on the street standing outside my apartment.
Albert: Did you say hi?
Luke: I was looking very busy on the way to work it seemed.
Albert: Yeah, and obviously, it won’t be as good as being there in person, but perhaps these virtual holidays could be a more affordable or more accessible option for some types of vacations. And there are several startups in the space. I came across one called Lithodomus based in Australia, who specialise in recreating ancient sites for tourism and education. Just imagine walking around some of these famous landmarks around the world without leaving the comfort of your own home. And you could be doing this with friends sitting in their homes anywhere in the world.
Luke: Yeah, like I don’t know about the social aspect of it, maybe, but the education aspect is massive. To be able to take a classroom of kids and actually go back and revisit ancient Egypt and walk around the pyramids. That’s pretty educational. And I will admit if I’m in the Oculus, it doesn’t feel like you’re playing a game. It feels like you’re actually in an experience. Your brain does fool yourself into thinking you’re really there.
Albert: Maybe if we had that in our day, my history and geography lessons would have been more memorable.
Leadership
Albert: Let’s move on to leadership, Luke. And Matterport was founded in 2011 as we said earlier, and it was founded by two guys, Dave Gausbeck and Matt Bell, and there’s an interesting story on how they started, right, Luke?
Luke: Yeah, yeah, founder, Matt Bell, had been working for a gesture recognition company and they were using a $50,000 camera and expert operators to produce huge CAD files that could only be accessed through a specialized application. Well, Bell was flabbergasted when the X-Box launched and the power of the $150 Kinect camera, and he realized the potential for a relatively cheap device with the same technology that could let anybody map out rooms and create 3d models accessible straight from the web. So he left his company and partnered with Dave Gausbeck and went on to found Matterport to build that camera and that capability.
Albert: And Matt Bell left in 2017, and he publicly announced this and said it was due to personal differences with the CEO at the time, but Dave Gausbeck continues on to be the chief scientist at Matterport. And before he founded Matterport, he was the chief technical architect at PayPal, but we couldn’t find any information on his current stake in Matterport.
Luke: I’d imagine it’s substantial. And they’ve got a new CEO. They brought in a guy called Raymond Pittman, who goes by the name RJ, and he’s been CEO since December 2018. And he used to be a key leadership figure at eBay. He was their chief product officer and RJ owns 3.5% of the company.
Albert: Yeah, it looks like he’s worked his way around Silicon Valley. In fact, most of the leadership team have come from various big tech firms, such as Salesforce, LinkedIn, and PayPal. And the company currently has around 450 employees and looking at the Glassdoor ratings, it has a rating of four out of five overall, 68% would recommend to a friend, while 80% approved for the CEO, RJ Pittman.
Luke: That’s okay. It’s not great. That’s probably poor to average for one of these kinds of companies.
Albert: And I would have preferred to see high insider ownership amongst the leadership team. I know that the board of directors have high ownership from these early investments, but it would have been better if the leadership team itself had higher insider ownership.
Luke: I guess it makes sense. If you’ve got a new CEO, he’s probably done well to pick up even 3.5% of the company. That will grow over time.
Total addressable market
Albert: Let’s move on to the most interesting part of this, which is the total addressable market or the TAM. And the company itself has estimated that there are 4 billion buildings in the world containing 20 billion spaces, and they’re implying that this is their addressable market, all these 20 billion spaces.
Luke: Yeah, and they’ve estimated that if they can just monetize $1 per space, that’s $240 billion. That is a pretty wild way of calculating the TAM. Like I’m sitting in a space now, one of those 20 billion, how are they going to earn a dollar from my little office at home.
Albert: It’s just a dollar a month, Luke. Are you not prepared to pay $1 a month for a 3d model of your house?
Luke: I would pay $1 a month for there to be no 3d model of my house online! Surely that is like a crime risk. Dear burglars, please figure out where the entry points are and how much valuable stuff I’ve got. By the way, none, burglars, none.
Albert: Haven’t you got a quite valuable collection of poker books, Luke?
Luke: They’re valuable to me but have no intrinsic value to the rest of the world.
Albert: Well, if this is the real TAM, then Matterport have captured less than 0.1% of it. And so far, they’ve captured around 5.6 million spaces. That might sound a lot. It’s actually a tiny fraction. Of course, not every space will need to be mapped. Just from those numbers, it seems like their runway could be huge.
Luke: It could be. I’ve got a buddy, Jai, who’s spent months, I think, creating a very detailed AutoCAD design of his own home. He was doing an extension, and he won’t mind me admitting this, right, he’s a bit of a geek. He likes to do 3d printing. He’s into all that kind of stuff. So he did it kind of for his own entertainment to have his own 3d model of his house. So a guy like him, he’s going to really enjoy something like Matterport and they can create like a superb up-to-date model and keep up to date. Your average Joe is not going to be interested in that kind of thing. I think you can scotch all those billions of $1 that are the residential market.
But you’re right, let’s go look at some of the other markets and where they can make money. So you’ve touched on real estate. That makes total sense that if you’re selling a house, you’d want to have a really cool 3d model with all the furniture in it, where you can walk around and really get a sense of what it is you’re buying.
Albert: And to get a scale of this market, they were around 6.5 million homes sold in the US in 2020, and this is expected to be 7.1 million in 2021, but I wouldn’t be surprised if this was much higher than that given the market at the moment. And it’s likely that a new scan will be needed each time a home is sold as buyers will want to see a recent view of the property or not one made several years ago. For example, they want to see if there’s been renovations, if there’s been damaged, or just the general decor.
Luke: And the same for Airbnb. Airbnb have over 7 million listings these days globally. And that would also make total sense to have a real virtual tour. Go wander around and, you know, you’ve got that fourth bedroom, go out and look in there in VR and see is it really big enough for the group that you’re planning is take on vacation.
Albert: I think I saw an estimate that there’s 1 billion homes in the world. And if all of those need to be scanned, that’s a massive market. But the exciting part of this, which can also be seen as a risk, is that it’s possible that many of the uses of this data have not been thought off yet. And board member, Peter Hebert, said in an article on Medium, “Today, Matterport transforms buildings into data. Tomorrow, that data will increase the value of every space.”
Luke: Yeah, I guess we refer to that as optionality. There are use cases that nobody’s thought of yet, including Matterport, and making these technologies widely accessible and having this huge library of buildings and spaces online is going to unlock value that we just haven’t figured out.
Albert: Well, Luke, what are some of the other industries and use cases Matterport is being used for?
Luke: So again, drilling back into their own investor relations materials, one of their big customers is a company called Lindner Hotels and a bit like the Airbnb use case, Lindner have put many of their properties and all of the actual rooms online. So you can go and view and see is that little double bedroom big enough or might you want a suite? But also not just the rooms, their event spaces as well, and that makes total sense. If you’re about to run an event, maybe you’re planning out the logistics, quite nice to be able to kind of see the flow of traffic and where the lighting is and how it’s all going to work. So you can simulate your event in VR and plan it ahead of time to work out is that space suitable for what you’ve got planned?
Albert: Yeah., that makes absolute sense, Luke, and you mentioned insurance before. Well, I guess another obvious use case is construction and interior design.
Luke: Yeah, you sent me an interview this morning I was just listening to where the Matterport CTO was talking about capturing a construction at different stages. So if you bring your electrician in at the end to put the cables, he can go back and look at our previous Matterport scan and see where the pipes were laid so he doesn’t drill into them. I’m scratching my head about that one a little bit.
Albert: Yeah, I think your argument was that there are machines now that tell you where pipes are in the wall. And would you trust a diagram before you drill into the wall and possibly into an electrical wire? I don’t think so. You will check first.
Luke: But and also like regular architect process, they have detailed blueprints and you plan this stuff out anyway. Maybe you could optimize the way architects work and the way they create the blueprint. Maybe you could create a scan to see what the building looked like compared to the original architect’s drawings. I’m not sure about how you monetize that construction process.
Albert: Yeah, and another use case could be in industry where things like retail spaces, warehouses, could be scanned in, and it could actually use IoT devices and monitor that space in real-time.
Luke: I think that’s the interesting one. There’s almost certainly significant value to be had there. Let’s just break it out a little bit. So when you say IoT, talking about internet of things, so this is like having the ability to control a real-world object digitally. So you can imagine if you’ve got a production line, you could go tour that production line, walk the line, go visit each machine, see is it working, what the various metrics are saying, maybe turn it on, turn it off, maybe adjust certain settings on it to optimize the line. You could kind of imagine, as well as having your robots on your factory floor, you’re controlling and seeing where they are in real-time and actually able to optimize the way the factory is operating.
Albert: And in fact, those robots could use this data to operate more efficiently.
Luke: Yeah, exactly. And there’s real value for the company that owns the factory there. I could see this potentially becoming fairly standard – to build a digital twin of your warehouse environment to manage it.
Operations
Albert: So, how does Matterport work? As you said earlier, they are both a hardware and software company. They actually sell the cameras used to scan the spaces. And for the highest degree of accuracy, you do want to use their cameras. They sell one called a Matterport Pro 2 camera, which costs around 3,000 US dollars, and they are the best 3d mapping cameras you can buy. But you can also use other devices, including your iPhone, but obviously, the better the data capture device, the easier and quicker the process will be. But that’s just the data capture. The real value is converting all that data into a digital representation of that space in your computer, and that is done on the Matterport Cloud.
Luke: You had to go at this didn’t you? I haven’t got an iPhone. I’ve got an Android phone, but you had a go at scanning your apartment at home. How was that?
Albert: Yeah, I downloaded the app a few days ago and I started scanning my home. It’s actually a very time-consuming process where you have to do maybe a hundred scans to get a real, accurate picture of the entire place. But so I did about three or four scans, and even from those three or four scans, it actually got the general layout of the room quite accurately. Obviously, the things in the room were pretty low resolution from those three or four scans, but I was quite impressed with what it achieved just from those scans.
Luke: And easy to use, right? So you could roll this out to anybody.
Albert: Really easy to use. You literally stand in one spot and it tells you where to point the camera. So you point it there, then it tells you where to point next, and you put it there, and you do this about 10 times for each spot, and you move around the room doing it from various spots. Eventually, it will capture the entire room.
Luke: Yeah, it’s pretty cool.
Albert: And what the Matterport Cloud does – it takes all this data, all these images that it captures from your device, and it converts them into a 3d representation from which you can generate videos, floor plans, and 360-degree panoramas. But one really cool representation that I saw is a dollhouse view where you can see the entire floor plan zoomed out as if it was a dollhouse, and you can zoom in, rotate, and you can imagine being in VR, actually inside the room as well.
Luke: You mentioned the Matterport Cloud. They call that Matterport Cortex AI platform and that’s basically the real smarts. That’s where they’ve invested a lot of their research effort. It’s a neural network that automates away many of the tasks you’d need to do to create this digital twin, and it’ll identify objects within a room, measure spaces with a 1% margin of error, glue all these scans together and reconstruct the space as an immersive experience that can be viewed anywhere on any device.
Customers
Albert: Well, let’s talk about customers, Luke, and the company say they have 400,000 subscribers in 150 countries, but they have a freemium model and only about 20% of the subscribers are paid subscribers.
Luke: Yeah, they say more than 13% of the Fortune 1000 companies use Matterport technology today. A lot of room to grow, but they’ve got decent penetration.
Albert: And in terms of how they make money, revenue comes from four categories. The first one is subscription revenue, and this is access to their mapping software and this comprises 52% of their revenue in the last quarter. This is a high-margin business with gross margins of around 78%, which is actually up from 71% from the same period last year. And I guess you can see this as their SaaS business, and it’s the main driver for growth.
Luke: They make about 7% of their revenues by licensing out much of that data that they’ve captured. It’s not a big piece of revenue, but it costs them almost nothing, like 98% gross margins. And I guess it will become more valuable as they capture more and more spaces and build up this library.
Albert: However, I do see this as a potential privacy issue. Would you want your scan of your home available on the internet?
Luke: Well, definitely not. If you knew that was my home, as opposed to some generic home somewhere in the world.
Albert: Yeah, but I assume that if you see a plan of a home, you would want to know what it is.
Luke: Perhaps.
Albert: The next part of that revenue is services, which comprises 10% of their revenue in the last quarter, and here, they have capture technicians and they basically go around to help you scan your space. And they’re actually hazmat-certified so they can go to damaged and dangerous places for things like insurance assessment.
Luke: And then the last 31% of revenues are from the product itself, like selling their hardware and cameras. It’s a low-margin business because there’s physical goods involved, 35% gross margin. And to be honest, it’s probably a bigger part of their revenues than I’d like. We don’t really see Matterport being a hardware company. They’re a software company.
Albert: Yeah, over time, we want to see their subscription business grow to become a larger part of their revenue. And it really is the subscription business that is the reason for our interest in investing in this company, not the hardware business, otherwise, it could become another Go Pro.
Luke: And we are starting to see signs of that happening. Subscription revenue was 41% of total revenue last year, and it’s 52% this year, so it’s definitely becoming a bigger focus area. And the company’s estimated that subscription revenues are going to be 86% of their revenues by 2025. So that really is the key metric to keep track of.
Albert: As you mentioned earlier, they offer a freemium model where users can try out Matterport for free before becoming paid customers to unlock the full platform. And some enterprise customers that have gone through that route are Shopify, Starbucks, Whole Foods Market, and WeWork. Pretty big names and overall their subscriber growth increased six-fold in 2021, partly accelerated by the pandemic, but still very quick. And their revenue grew 108% year-over-year to be $27 million in Q2 this year, compared to Q2 last year. And I think management is guiding for total revenue for 2021 to be about 123 million, a year-on-year increase of 43%.
Luke: And as you say, they’ve accelerated recently and part of that was due to the availability of the iPhone app. I think that launched in early 2020 and that’s just made their capabilities available to far more people. And as smartphone cameras and as small cameras get more and more capable and start to introduce things like Lidar, you’re just going to get better quality scans much faster. You don’t have to take those hundred different images to capture your room. You’ll be able to do it in a few minutes.
Albert: Yeah, that was a huge growth driver, Luke. If you look at the chart of their subscriber growth, the rate of growth increased dramatically from when they launched the iPhone app. And I believe they just recently launched an Android app and this could mean even more customers coming on board, especially in international markets where Android has a higher market share of the smartphone market.
Luke: I did have a play with that yesterday. It’s pretty crap, actually. It gets terrible reviews for the people who did get it working, and on my phone, it asked me to plug in an external camera. So I think it’s just kind of early days with that beta-style app.
Albert: I find that surprising. I thought these days that most apps are built to run on both iPhone and Android.
Luke: Yeah, not yet.
Albert: Well, that just tells you, Luke, get an iPhone.
Brand
Albert: As for their brand and reputation, I saw that Matterport, it was recognized at the best AI-powered spatial data solution by the 2020 Tech Ascension Awards. I’ve never heard of these awards, Luke, and I do wonder just how many contenders there were for the rather specifically titled AI-powered spatial data solution.
Luke: Yes, in the Matterport category, the winner is Matterport!
Albert: I did a little bit of digging and it seems that 2020 was only the second year of the Tech Ascension Awards, so take that as you will.
Network effects
Luke: Let’s talk about network effects a little bit because this is quite interesting. So as we said before, they’ve got over 5 million spaces they’ve captured today and that’s a tiny fraction of the world, but, albeit, still a hundred times more than any of their competitors. But the more spaces they capture, the better their technology gets and the more valuable this licensing data gets.
Albert: Yeah, imagine being able to experience other spaces more easily, I might help like designers and architects with their projects, getting inspiration from the work of others and being able to see what works and what doesn’t. But I can also think of some more nefarious uses for this data such as military training or even planning a heist. And I’ve read that video games, such as Call of Duty, are being used to train soldiers, and F1 drivers are using F1 video games to practice real-world tracks. Well, maybe criminals can use this real-world data in a simulation to take over the Vatican!
Luke: I was thinking if you’re a security guard at a bank and you see someone wandering around taking 3d images from a hundred different locations, that’s probably going to be a little bit suspicious, but you might get away with that in the Vatican. That’s what tourists do every day.
Albert: I think I only mentioned the Vatican because I watched Mission Impossible 3 recently.
Luke: I might be overdue rewatching The DaVinci Code. That’s a great movie.
Albert: I haven’t watched that, Luke.
Luke: Have you not? That’s a great film – Tom Hanks, Dan Brown.
Albert: I’ve read the books, Luke. I used to read Dan Brown books on the way to work when I used to live in London, and the reason why that was is because my bus journey only lasted five minutes and each chapter are around two pages.
Luke: It’s a good book and the film’s decent too.
Optionality
Albert: Getting back to Matterport. Eventually, the whole world could be digitized and there will be a digital twin of every building on the planet. Just imagine how useful that information could be.
Luke: Yeah, I suppose companies like Google are going after this already, right? You can walk a Google Street View of pretty much anywhere in the world these days.
Albert: And with Matterport, you could go into the buildings and walk around them as well. I’m surprised that Google have not used this technology to enhance their Google Maps.
Luke: They definitely rolling out Google Inside or something on Street View where you can go inside buildings. Maybe they’re using competing technologies there.
Albert: And this optionality is a big reason for our interest now. The technology appears to be mature and will no doubt improve over time, becoming more accurate and faster every passing year, but it’s possible that many of the users of this enormous dataset probably haven’t been thought off yet.
Luke: Yeah, absolutely.
Albert: And Matterport has opened up their platform to developers to build applications using the spatial data, and they have over 50 platform partners now.
Luke: Yeah, one of their key partners is Facebook and they’ve announced a collaboration with Facebook AI Research (FAIR) through which they’ve created now, the largest ever dataset of 3d indoor spaces to teach robots and virtual AI assistants how to understand and interact with the complexities of the physical world.
Albert: And as scary as a Facebook-controlled robot in your home sounds, I think this is a key partnership. I think we found out recently just how important, the metaverse is to Mark Zuckerberg and Facebook, and in their latest earnings call, they said that they will become primarily a metaverse company and they have over 10,000 people working on VR and AR projects.
Luke: Yeah, you know, we don’t buy companies for their potential to be acquired. We like to ride this journey for decades and see how the company grows itself, but you could see they would be a real key acquisition target for Facebook.
Albert: Not just Facebook, well, maybe CAD companies like Autodesk. It kind of fits in with their business quite neatly as well.
Luke: So, we mentioned Facebook, but they’ve got other key integrations as well. And they’ve got a platform integration with a tool I’ve not heard of, the PTC Vuforia Engine and Vuforia Studio. So apparently, this is used to create augmented reality tools for industry.
Albert: And they’re also branching out to other industries. For example, they have a key partnership and investment in a company called SIMLAB, which is a technology company that specializes in the digitization of buildings throughout the design and construction phases. I think this ties in with what you said earlier about using Matterport to scan buildings at various phases of their construction.
Luke: And they’ve got a partnership with a company called Apex which enables retail brands across the US and Canada to access and collect building data and information from their stores in one place. And actually, if you imagine retail brands, you could then almost imagine visiting a shopping mall in VR and maybe going shop to shop and actually just buying the goods through a much more intuitive virtual platform, rather than going to their web page to buy their goods.
Albert: And it’s really exciting to see Matterport extend out into other industries other than real estate. It kind of reminds me of how Unity is expanding out of video games and into other industries.
Luke: Not dissimilar to Unity, right? In terms of the metaverse, Unity, Facebook and Matterport, they’re all kind of edging around the same market in some ways. You bought a unity stake, didn’t you? After we deep dive it a few months ago.
Albert: Yeah, it’s doing quite well, I believe. And I think I mentioned this to you a few weeks ago, that we considered metaverse as a tailwind for the model portfolio this year and we decided in the end not to include it because we didn’t think it was ready. I think we’re seeing the signs now of that whole space maturing, and I’m quite keen to include a metaverse company in our portfolio next year.
Luke: Yeah, I agree. I was saying to you on WhatsApp the other day, we’ve got a review to do at the end of September and then we should probably start thinking about our 2022 model portfolio. So yeah, I’m keen to look at this space in more detail then.
Competitors
Albert: Well, let’s move on to competitors, Luke, and there are several competitors for mapping interior spaces in the real estate market. For example, Zillow has one, but I think Zillow is seeing adoption of its app to be quite slow because Matterport has a brand advantage in that space because it was the first player in that space.
Luke: And I think Airbnb currently create virtual tours with a partner called Digital Era 360, but if Matterport has got the better technology and it’s faster and better quality scans being created, you can see them moving closer to them.
Albert: And one advantage for Matterport is that you can use a smartphone as the capture device and most of the others need specialized cameras. And I think you mentioned earlier, Luke, that they have over a hundred times the data of all their competitors combined. This gives them a huge first-mover advantage and data advantage. I guess the risk is that competitors catch up and their technology becomes just as good as Matterport’s.
Luke: But for a young company, it is interesting that they do appear to be the leader, currently.
Albert: I do wonder that as time goes on, do we need 3d scanning software? Because most buildings these days are designed in a computer and will have a 3d model, but then you get to think about all the buildings that currently exist. There’s billions of buildings and most of them do not have a 3d model.
Luke: I was musing last year as I was using Google Street View AR and I was kind of wandering along and just trying out the AR tool to navigate from one place to another. And I realized, actually, as well as giving me directions, I’m suddenly giving Google a real-time view of the street I’m in. I wonder if Google can turn that into a real live view at some point if everybody’s waving their cameras around or perhaps wearing their Google Glass with a permanent camera attached. We might quickly actually see a real real-time digitization of the entire planet. And you want to see what the traffic’s like in a particular street you’re heading to where you can actually go and look at where the parking spaces are right now.
Albert: And these companies like Google and Apple with these VR glasses, are they going to build this technology themselves or are they going to use Matterport to build a 3d model.
Luke: Or just buy Matterport and integrate the technology directly.
Financials
Albert: It’s a new company so we don’t have many financials to go through. They only have the first quarter of earnings last quarter. So, they announced their Q2 results on the 11th of August this year, and they recorded a total revenue for the quarter of around $29.5 million. This was up 10% quarter-over-quarter and 21% year-over-year. But as we said, the interesting number is their subscription growth and that grew 53% year-over-year.
Luke: Their dollar retention rate is pretty solid. It’s currently around 132% from 129% the quarter prior. So that’s good, shows that customers are enjoying using their products and sticking around.
Albert: Yeah, but the business is not currently profitable and it lost around $11.6 million from operations in 2020, and I believe they don’t expect to be free cash flow positive until around 2024.
Luke: That’s a non-issue for such a young company though. You wouldn’t expect them to be profitable for a long time. They’ve got so much investment they have to do into their technology and their AI platform, so they can be burning through money. But they’ve got plenty of money to burn through. So they had around $42 million just prior to the SPAC, but the SPAC itself raised another $600 million, so they’re literally sitting on a ton of cash. If there are only burning $11 million a year, they’ve got 60 years of runway.
Albert: Well, let’s hope they’re not literally burning the money and are investing it into assets that can return value for their shareholders.
Key takeaways
Luke: Well, let’s bring it into takeaways. What do we think about this company? They’re young. I think the key thing is we don’t really understand the use cases. They’re still being worked out.
Albert: But they have a huge total addressable market and have plenty of runway if that TAM is real, and with their cash pile, they have time to work out how to use this data in a profitable way.
Luke: They’re not cheap. Their market cap is $4.3 billion on revenues of $120 million. So with a price-to-sales ratio of over 30, it’s certainly not a cheap stock today. And if there’s any sign of growth slowing, that’s likely to punish the share price.
Albert: And one concern that I have is that this 3d mapping technology could be more of a feature than a complete product. Maybe it’s like a Street View for Google Maps.
Luke: So all in all, I would categorize this as a bit of a punt, a bit of a gamble, but to be honest, that’s the purpose of a hypergrowth investment, right? And it’s why we only take a half-a-percent stake if we do choose to buy in.
Albert: So, Luke, will you buy in?
Luke: Yeah, I think I might actually. I think I might. I do like these little punts. The way they state their TAM, I think, is complete nonsense, but I think they are going to stumble into some very valuable use cases. And if they do have the best technology, then they’ve got a good chance of being the winner in this space.
Albert: That’s the gambler in you, Luke, but speaking for myself, I think I’m also interested. I might also take a punt. I think because of the optionality and the potential users of this data, it might grow significantly.
Luke: And I’ve got to figure out how I’m going to free up capital for this now because I’m almost down to zero cash in my portfolio. I think I’m going to sell some of my older, long-tail stocks, like TakeTwo and maybe SolarEdge, and that’s going to free up some money to let me buy a bit of Matterport.
Albert: And I’m thinking about trimming my Tesla position, the stock that you would never sell, right, Luke?
Luke: I’ve trimmed Tesla many times but I’ll always keep a stake.
Albert: Yeah, I do understand the bull case for Tesla, but there’s also a big bear case as well. And they’re not the only people now making electric vehicles. Every auto manufacturer is making electric vehicles now.
Luke: Cathie Wood has just published her bear case price target of $3,000, which is a significant multiple on today’s valuation.
Albert: And that’s the bear case. What’s the bull case?
Luke: I don’t know. It’s bigger than $3,000.
Albert: Infinity.
Quote
Luke: Alright, so I think the conclusion is we’re both go buy a little piece of Matterport, so let’s hopefully put some green on the scoreboard when we buy that later this week. But it’s an expensive company and, Albert, I’ve got a quote or actually a proverb for you this week to close out the episode that ties into that. “No price is too low for a bear or too high for a bull.” Is Matterport too pricey for you?
Albert: It might be, Luke. It might be.
Luke: No price is too high for these bulls. We’re buying some Matterport.
Albert: Who said this, Luke?
Luke: Unknown proverb.
Wrap
Albert: Well, that’s all for this week. Thanks for listening.
Luke: If there’s a future topic you’d like us to cover, you can message us on Twitter. I’m @LukeTelescope.
Albert: And I’m @AlbertTelescope, or you can email us at feedback@telescopeinvesting.com.
Luke: If you enjoyed today’s episode and we hope you did, you can find more content at our website, telescopeinvesting.com, where you can leave us a comment or a review.
Albert: And if this is your first time tuning in, perhaps consider subscribing to the website so that you’re the first to hear about new articles and episodes as they drop.
Luke: Thanks, Albert.
Albert: Thanks, Luke.
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