• Brett Schafer

Deep Dive: Matterport

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Show Notes

(Ryan) What they do: Matterport essentially turns physical structures into data. Thus the name Matterport.

So the way the technology works is someone (could be a real estate photographer hired by an agent, could be an enterprise company employee, or could just be a homeowner) goes through a building or a physical space and takes pictures. These pictures can be taken on several different devices. Could be the Matterport Pro2 which is their proprietary 3D camera (I think this leads to the highest quality), could be a number of other 360 cameras, or could even be an iphone.

Once the user submits these inputs from their capture device, Matterport’s software engine called Cortex, uses visualization algorithms to build a 3D model of the space for other users to tour. They call this end visual a digital twin.

But the customer use cases vary widely. So one example would be a real estate agent who is trying to sell several houses and wants to give potential buyers a detailed digital tour. Another example could be a warehouse, who has to meet certain safety qualifications so an inspector can go in and look at it. Or enterprise, this is what they say they are really going after. Enterprise corporations could use this for a range of things. If they are hiring a team to come in and doing an internet configuration they could send them their digital twin.

And then pricing ranges. Basically you can create an account and upload one space for free if you’re using an iphone. But if you want multiple spaces or more of a professional grade digital twin, you have to pay a certain monthly or yearly rate. But it’s mostly all user generated content that gets uploaded, and every capture becomes a part of Matterport’s spatial data library which helps its assumption algorithm improve.

(Ryan) History: Matterport was apparently spawned out of the Xbox Kinect Hacker scene in 2010 and was officially founded in 2011 by Matt Bell. Apparently, Bell was working for a gesture recognition company and out of an inspiration from Kinect he teamed up with David Gausebeck who was responsible for devising the first CAPTCHA security system at Paypal and the two of them powered through Y combinator and got a $1.6M seed round in 2012. In 2014 they apparently got heavily into the commercial real estate market and raised a $16M series B. In 2017 they brought in RJ Pittman as CEO.

(Brett) Industry/Landscape/Competition:

  1. Let’s get bullish and use some of their SPAC presentation stats

  2. They estimated $240 billion TAM on 20 billion spaces around the globe if they all get digital twins/spatial data (it now is in around 5 million)

  3. All outside research seems to think digital twins will grow rapidly over the next decade

  4. Competitors: Zillow’s in-house product, EyeSpy360, EasyPano Virtual Tour, VPiX, Cupix, 3D Vista, Pano2VR. There are a lot and all seem to be focused on real estate tours

  5. A few things to watch are if any of these competitors can build a viable smartphone product (Zillow is already like this but for specific, simple use case), and if its partners (Autodesk, Unity, others) with software expertise ever come out with in-house products. That will be a test of Matterport’s moat.

(Brad) Management and Ownership:

RJ Pittman — CEO not founder

  1. Chief Product officer at Ebay

  2. Head of e-commerce platform at Apple

  3. Former Google project manager

  4. Seems less in your face, over the top my company is amazing in interviews but also articulates the bull case & his optimism effectively. Healthy balance here.

  5. 76% GlassDoor rating but only 83 reviews so not a lot of data there

  6. MICHIGAN alum (so he’s automatically amazing Go Blue)

J.D. Fay — CFO

  1. Harvard B school

  2. Silicon Valley Business Journal CFO of the year award recipient

  3. Significant experience as a financial higher-up. Not headline experience like Pittman has

Jay Remley — Chief Revenue Officer

  1. Former director of Google Cloud

Other highlights

  1. Early architect at Paypal

  2. VP of the Real Real and Salesforce

  3. VP of design at Ebay & a former Creative Director at Apple

Ownership

  1. Existing investors rolling over 75% of the outstanding equity

  2. GHVI shareholders get 12%

  3. PIPE gets 10% Black Rock fidelity tiger global

  4. Sponsors the remaining 3%

(Brett) Valuation:

  1. This is a pre-merger SPAC so we have to do some math here for a market cap, merger is “imminent” though

  2. Ticker GHVI, will trade under the ticker MTTR post merger

  3. Current price of $13.95, but merger goes through at $10 a share, so investors are buying at an estimated $3.2 billion enterprise value (cash position subject to change, plus potential for dilution)

  4. EV/sales of 25.6 based on 2021 revenue estimates

  5. Projecting to stay unprofitable until 2024, but is guiding for gross margins to expand rapidly. Something to watch out for as subscriptions become larger part of the biz

(Ryan) Earnings:

  1. $86M in revenue in 2020, up 87% YoY (They break down revenue into 4 parts)

  2. Subscription revenue. This is people just paying to utilize the technology essentially. 48% of revenue, but will likely be higher over time.

  3. License revenue. This is Matterport allowing certain customers to access their spatial data library. I imagine this is company’s that need access to all the data like apartments.com or redfin or something. 98% gross margin but only 4% of revenue.

  4. Product revenue. This is mostly them selling various capture devices. Logically this should shrink as the business scales since it isn’t a repeat purchase really. 2nd largest contributor to revenue.

  5. Services revenue. This is like an enterprise says, hey we want a digital twin of our building. Can you just send someone in to take the pictures and they pay for it.

  6. 56% gross margin overall, up from 48% a year ago.

  7. But they’re spending a lot of money on operating expenses. Which isn’t surprising given that they have a lot of VC funding. Would almost be irresponsible not to go after the market opportunity here.

  8. So an $11.5 operating loss for the year.

  9. Negative $8M in FCF. Getting closer to profitability, but will likely invest a bunch of money following this merger. So not expecting positive FCF until 2024.

  10. Net dollar expansion rate of 112%

  11. 4.3M Spaces under management. A number they really tout a lot.

  12. 254k subscribers, up 542% YoY (83% of those are free subscribers)

  13. Expecting a 54% revenue CAGR over the next 5 years. Not impossible, but seems optimistic.

(Brad) Balance sheet and liquidity:

Will have $655 million in cash on hand post-merger and 0 debt but quite far from profitability. Not expecting a positive EBITDA margin until 2024 so there could absolutely be more raises in the future.

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Anecdotal Evidence:

  1. (Ryan) Watched a video of an appliances retailer using this on their site to help customers get an idea of what stuff looked like in person. It helped me kind of imagine the possible use cases.

  2. (Brett) Don’t want to get caught up in TAMsanity but what they say sounds somewhat legit on a long enough timeline. Comment on YouTube: “I use Matterport and DJI drones on a nearly daily basis for insurance claims documentation and litigation support. The tech is game changing.” That sounds great, however, saw a lot of “many agents find it to be too expensive and complex” in product reviews.

  3. (Brad) When I worked for a company called Bedrock Detroit (StockX & Rocket family of companies) we were flirting with integrating it into our residential properties. I left before we made a decision & I have no idea what they did but the software was very cool

Future growth opportunities:

  1. (Ryan) Launch of the android app (currently in beta). Android comprises 72.8% of the mobile operating system market, and allowing it to capture physical structures would ease their international expansion plus boost their number of spaces. Another growth opportunity could be the add-ons, their platform allows extensions so you can document certain spaces, say on a construction site. (Ryan they mentioned 85% of smartphones are run on Android in the Q1 transcript)

  2. (Brett) Launching partnerships left and right. Latest was with PTC and its augmented reality tools. So many buzzwords I couldn’t keep up but it sounds like the combination of the spatial data technology, AR tools, but built for industrial purposes. The moves outside of real estate seem the most promising, as almost every competitor looks solely focused on RE.

  3. (Brad) Signing clients like Wynn or MGM seems like a solid expansion plan to me. Seems like a partnership with Snapchat or Facebook to bring use cases to the business to consumer World could be fascinating. Thinking about walking around a store from my computer & also being able to try things on via Snapchat’s AR they’re trying to build out

Highlights and lowlights:

  1. (Ryan) Highlights: No need to capture a structure twice. Therefore the larger the spatial data library gets, the larger their competitive advantage grows. Also, the larger their spatial data library gets the more incentivized platforms are to ask for licenses to it. Which is 98% gross margin. Lowlights: Obviously don’t know the ins and outs of the tech which makes it a little tough to know whether or not others can replicate it. Also the ex-CEO filed a lawsuit this week against the company claiming that Matterport is putting onerous restrictions on his shares.

  2. (Brett) Highlights: Growth, potential, and unit economics. If everything can be fully automated (tagging, etc.) then the value proposition vs. competitors will soar due to time saved. Lowlights: Two concerns I have been thinking about: How many people actually want to pay for this stuff (at Matterport’s premium price)? And claims of data advantages just don’t do it for me, Is this a tool, or a company? (an example could be the road/3D view on Google Maps. Alone that is nothing, but it is a great feature on Google Maps)

  3. (Brad) The LTV/CAC (if legitimate) is absolutely fantastic. Retention soared last Q. Essentially means they have a limitless supply of productive dollars to spend on profitable growth and pairing that with a massive TAM the runway here is very long. Love seeing companies like Airbnb using it. Lowlights is hard to pick at outside of a ridiculous valuation. But I’ll go with the margin profile not being all that compelling (today there’s upside as Ryan mentioned). It’s lumped into that high margin SaaS group and rightfully so, but the margins are inferior as of now. 55% GPM isn’t terrible but not good for the group it’s in and pairing that with a -27% operating margin means they have to balance approaching profitability & growth.

Bull Case:

  1. (Ryan) Matterport’s tech is as superior to its competitors as it sounds and the capital from this offering helps fuel growth. Could see a very real world where they generate $500M in FCF. The opportunity seems large enough.

  2. (Brett) At the current valuation, you have to expect Matterport to get to a few billion in annual revenue and around $500 million in free cash flow in order to have acceptable returns over the decade. Wouldn’t be surprised if they can do that but that is a ton of growth.

  3. (Brad) The company doesn’t just serve the RE market but every single use-case for needing a digital visualization of a physical building. It can utilize its LTV/CAC to be as aggressive as it wants with growth

Bear Case:

  1. (Ryan) There isn’t that much differentiation between them and the alternatives. If this photorealization process becomes commoditized, I’m not sure Matterport would be able to generate enough in cash to warrant the valuation.

  2. (Brett) Struggles for product adoption outside of easy use cases, competitive advantage isn’t as strong as investors assume, the value in the supply chain doesn’t flow to Matterport are reasons that this could end up being a poor investment. I have no conviction either way though.

  3. (Brad) Again hard to pick at outside of valuation. Great company. Too many things no focus Companies like Unity begin to more directly compete with Matterport and take share. This weighs on its LTV/CAC and pushes out profit estimates further down the road. It then has to pull back on growth spend to approach profitability & gets passed by other more quickly moving companies.

Our Sunday Deep Dives are sponsored by Potential Multibaggers. Looking for stocks that have the potential to go up 10x over 10 years? Check-out Potential Multibaggers on Seeking Alpha or on Twitter @FromValue

Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.

#GHVI #Matterport #MTTR

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