I’m back! Your friendly neighborhood Gumshoe has returned from an extended road trip with Mrs. Gumshoe and the little Gumshoes (who aren’t so little anymore, part of the reason for our trip was visiting colleges for our oldest), and I’m trying to catch up with a giant pile of correspondence and decide which new super-secret teaser picks we’ll detangle next… if I missed your notes or comments over the past couple weeks, well, sorry — I can’t get to them all, but we’ll do what we can.
And the one that floated to the top of the overflow pond this morning was from the Riskhedge folks, an ad that teased one of the stocks they’re recommending for “Hypergrowth America” — so what might we give the Thinkolator to chew on after a long layoff?
The pitch is for Stephen McBride and Justin Spittler’s Disruption Trader, which is one of their “upgrade” newsletters (“on sale” for $2,000/yr), and the ad is basically a trade recommendation with the name of the company blacked out… here’s a little taste:
“Buy XXX Today….
“XXX is turnign the entire $230 trillion is turning the entire $230 trillion global real estate market on its head by revolutionizing the way people think about property.
“Specifically, the company is leading the digitization of real estate layouts…”
And apparently this is one of those “pre-IPO” companies, a private company that’s in the process of going public through a merger with a Special Purpose Acquisition Company (SPAC)… we get these hints about that:
“This deal is expected to close before the end of this quarter. Upon completion of the reverse merger, XXXX will trade on the Nasdaq exchange under the ticker XXX.”
OK, so… real estate digitization, a Nasdaq-listed SPAC, and we also get a little sample stock chart of the SPAC that indicates it soared to the high $20-s in the February SPAC-mania, perhaps when the deal was announced or just because all SPACs were soaring at the time, and that it cratered out around $111 in mid-May and was priced around $14 on June 21. So those are some more clues.
What else? Just that they were saying on Sunday that it’s a buy at “current market prices” and they’ll go into it in more detail later.
So what’s the stock? Thinkolator sez this is a company I’ve mentioned briefly in the past, Matterport, which is in the process of going public with a SPAC called Gores Holdings VI (GHVI), assuming the shareholders vote in favor next week (as investors clearly assume they will — if investors hated the deal, it would be trading much closer to the SPAC’s cash value of roughly $10 per share, but Matterport’s ongoing updates and presentations about the growth of the business in the past few months have the shares at about $14.50 today).
Matterport is a company that does 3D digitization of physical spaces, using 3D camera capture technology and their own software platform to create “digital twins” for properties and therefore support all aspects of property management, from promoting sales or leases with brokers and property owners to managing physical spaces and visualizing potential improvements or dealing with insurance or restoration. This isn’t a segment that they “own”, there are lots of companies who sell 3D cameras and digitization tools and help to create “digital twins” of physical spaces, and this is a young industry so it’s tough to tell who might have a real competitive advantage or edge, particularly with technology changing fast, but they seem to me to be an early leader — and they certainly believe themselves to be the leader, with a large data library (more than 15 billion square feet captured) that is growing fast and a breakthrough technology that they say allows them to build simple iPhone image capture into their digital models. Their latest analyst presentation, from a few weeks ago, draws a picture of a small leader in what might potentially become a huge market.
I can’t really say with confidence that Matterport will win this race, there are a lot of real estate data companies, but they do have a nice integrated model with both hardware and data processing and management, and they offer a freemium service to property owners and real estate brokers that makes it easier to get in the door and build up, with high-margin SaaS memberships for power users.
As with all SPACs, the valuation is mostly based on projections of continuing fantastic growth over the next five years and the 2025 numbers tend to be highlighted — they expect a compound annual growth rate in revenue of 59% from 2019 to 2025, and a gross margin that will go from about 55% right now to the low 70s over the next few years, a nice appealing subscription software/data platform if they can really grow in that way.
And so far, they are growing faster than that — 2020 was obviously a fantastic year for digitizing real estate, with so many people buying properties without being able to visit them in person first, and with so many business owners in a bit of a panic about how to market their office and retail properties through the pandemic, and last quarter they came in with revenue growth of 108% over the first quarter of 2020, with strong retention numbers (for SaaS companies who try to grow through both acquiring new customers (expensive) and upselling existing customers (less expensive), dollar-based net retention of revenue is an important indicator of their ability to keep and upsell customers, they call that their net dollar expansion rate and it has been very strong — 112% in the fourth quarter and accelerating nicely to 129% in the first quarter). We should take forecasts with some skepticism, of course, but so far they’re doing extremely well.
What, then, must we pay for such strong current performance?
That’s always the rub. Growth is wonderful, and strong and sustainable growth is often worth paying for even if you think you’re overpaying for the current business… but that means we really have to go beyond income statements and cash flow and think about the future. These kinds of investments require a qualitative decision about the appeal of the business, and the probability of this management team surprising us by building something far larger than is currently foreseen… but the probability of success is never 100%, so we have to use some sort of discipline in deciding what price we’ll pay or, when we research an idea and find it extraordinary compelling but overpriced, by limiting the amount we’re willing to invest if the valuation is optimistic and we determine that a too-high probability of success is baked in to the share price.
What does Matterport look like right now? Well, like almost every technology company that’s going public in a SPAC deal, the big reason for using five-year projections (which the SEC wouldn’t let you promote as part of a traditional IPO), is that five years from now is roughly when they see themselves becoming profitable. Technically it’s just three years in this case, they see themselves becoming cash flow positive and making an operating profit in 2024, when they foresee $12.7 million in operating income and $17.9 million in EBITDA. The actual numbers, for 2020, were a loss of $11.6 million on the operating line and $6.8 million in negative EBITDA, and that was a dramatic improvement from 2019 and seems like it could be putting them on a strong and sustainable path and ought to become profitable more quickly… but that’s because they spent lightly in 2020. They’re planning to ramp up their investments, presumably in marketing and sales but also in the capability to handle new customers, as they try to balloon last year’s $41 million in revenue into almost $400 million in 2024 and nearly $600 million in 2025, so this is definitely still an “investing to grow” company, not a “generating cash flow” company yet.
Will it work? In the reading I’ve done about this company I’d give them at least a fighting chance. They should be well-funded, since the SPAC transaction ought to go through easily with no redemptions (nobody will redeem a $14 stock for $10), and their recent performance has been strong and they have some very good relationships with a few hardware makers and with some major real estate and insurance industry customers with whom they could easily ramp up their relationship 10X if the customers continue to see value in these “digital twins” for space planning, marketing, renovations, underwriting or whatever else. The most appealing part of this business to me, qualitatively, is the relatively low cost compared to the value of these properties — they see the ongoing management and maintenance of this “digital twin” data as a big market as real estate moves further online, and they see 20 billion “spaces” as being their total address able market, which at $1 per space per month would be a $240 billion market in which to play. And while much of that space will certainly not “go digital” anytime soon, some of it will… and that kind of cost, relative to the other costs of building management or real estate sales and promotion, is not likely to be a big deterrent to customers if Matterport can add any value at all. Matterport illustrates the potential by saying that reaching 1% penetration in “digital twin” management would be worth $2.4 billion in annualized recurring revenue, and that they could make far more than that from upselling services and “digital property insights” to those customers.
So they may or may not get there, but the real estate market is so huge, and the SaaS “flywheel” so profitable if it works, that there’s a meaningful potential for Matterport to grow very large. As of their initial SPAC presentation they had about 330,000 customers in 150 countries, and have integrated with some key data and software platforms like Zillow, Audodesk, Verisk and others, and they believe themselves to be in a very strong “go to market” phase when they should be able, with the capital from this deal, to expand their customer base dramatically and push for a much larger relationship with their existing customers and, importantly, cement themselves into place as the leading brand in this space by delighting people with their free entry-level service and their “capture as a service” offerings that require very little customer commitment. They think their early advantage, with 330,000 existing subscribers and 4.9 million spaces under management (both those numbers are up more than 20% since February), put them far ahead of other players and present the opportunity to cement that advantage.
It’s been a good year for Matterport, with customer acquisition costs falling sharply and leading them to get “payback” from those new customers in less than a year, which is very good for a SaaS business that has designs on building long-term subscriber relationships… if you want to bet that this success will continue, you’ll have to pay about $14.50 per share for the privilege if you buy into Gores Holdings VI to get a piece of what should become Matterport. That means, given the details of the deal that were announced back in February, that you’re giving Matterport a valuation of about $4.2 billion. As of the first quarter they have annualized recurring revenue (ARR) on the books of $55 million, with expected total revenue for 2021 of about $113 million and for 2022 of about $200 million. That means you’re paying a stiff price of about 75X current ARR, 40X expected current-year revenues and 20X next year’s revenues. That kind of valuation would have been almost unheard of five years ago, and that presents a risk in itself should investor sentiment shift dramatically at some point, but everything is relative — and Matterport’s valuation doesn’t strike me as shocking in the current environment.
But as I said above, at those prices this really has to be a qualitative investment decision — the numbers aren’t enough. We’d obviously be paying a premium price here, and you have to judge whether or not it’s a premium company that can grow into and exceed those high expectations. I’m inclined to be fairly positive about this one, I like the potentially sticky position they have with large customers in commercial real estate and with brokers, and I think there’s a meaningful chance that digitized real estate will become dramatically more ubiquitous than we can currently imagine in the next decade, and that being an early leader could reap huge rewards… but I have not bought shares personally.
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As with all SPACs, it will also be interesting to see how they do in the months after the deal consummating, both how they begin to spend that new capital and how they begin to talk to investors once we start to focus on current business operations rather than 2025 forecasts… and, since this is a bet on a company building into something that could surprise us, it will be particularly important to become comfortable with management and their vision for the future. I haven’t looked into the history or the management team much, nor have I looked into competing companies, but I’m inclined to like the story here even as I recognize the risks that a premium valuation brings to the table… I’ll let the Irregulars know if I ever bite the bullet and actually buy shares.
That’s just me, though, and perhaps my brain is addled from a few thousand miles of interstate driving — it’s your money, so what matters is what you think… are you ready to pay up for a piece of Matterport as they try to build a tech leader in real estate? Think it’s too pricey, or too competitive a space? Have you ever actually used Matterport or a competing digitization company, and might you share your insights from that side of the desk? Let us know with a comment below.
P.S. Our readers always want to hear the subscriber perspective… so if you’ve ever paid for Disruption Trader, please do click here to let your fellow investors know what you thought about that subscription. Thanks!
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