Property: The final frontier for the digital revolution

How often have you booked a hotel that looked great in the photos but when you get there, it’s cramped, dated and nothing like what you expected? That’s happened to me way too often. This has got me thinking about how the digital world can better handle physical experiences, like booking a hotel or viewing a house for sale. In this article, I look at a company that is taking that challenge head on.

Property is a BIG market

So lets take a step back and revisit the problem. Property is the largest asset class in entire world with a market cap of around $230trillion.

Global Nominal GDP

According to the World Bank, that’s about four years of annual global GDP or in other words, the total combined value of all properties in the world, is around the same value as every item we produce globally, over a four year period – so that’s a huge number![1]

Meanwhile, most of this global property stock remains large offline, as it’s not digitally accessible.

Offline = Undervalued

The problem is that being offline, means being undervalued.

Intuitively, if you’re in the market to buy a house, then your first port of call will generally be online agents. If a property is not listed, its likely to restrict a large amount of potential customers, some of whom, would have been willing to pay more than whomever ends up buying the place. The same goes with hotels and vacation homes.

3D Virtual Tours

Being online doesn’t mean just being accessible to rent or purchase, it also implies being able to truly experience seeing/being in the property, without physically being there. The most effective way to do this is through a 3D virtual tour.

Research has shown that potential customers spend 5-10x more time on websites with 3D virtual tour access and for the 18-34 age category, they are 130% more likely to book a hotel/buy a home, if they have a virtual tour of the place first. In the real estate market, you get 87% more views if you have a virtual tour function and 66% of users would prefer it.[2] This means that currently, there are still large numbers of people who would have been willing to pay for a hotel room or property, if only they had an enhanced digital experience viewing the property.

Market size

The total global property stock is roughly 4bn buildings with 20bn spaces in the world. Assuming you could take that online at $1/per space/month, this implies a total addressable market of ~$240bn.

Total Adressable Market

My ‘Aha!’ Moment

This is when I had my ‘aha’ moment . So far I’ve only discussed the classic rental/purchase of real estate, but 3D property visualization can have far reaching use cases; such as helping facilities manage properties, renovation work, insurance underwriting and online tourism. (Yes I do mean being able to take a tour of Buckingham Palace from your computer screen!).

Then there are the synergies from having that data, such as being able to see how users respond to visual tours i.e. do they want to look at the bathrooms in a hotel first, what features do success retail outlets have in common, are renovations missing safety features. So the market could still be a lot larger than the $240bn mentioned earlier!

Various use cases for 3D Virtual Tours

The Trade: Matterport (Ticker: GHVI)

Matterport is the leader in the market for enhanced 3D Visualisation for properties. In short, they own the software that creates 3D virtual tours and their mission is to digitize properties, globally. They are present in 150 countries, have 250k subscribers worldwide, recorded 18x growth in 2020 and have 100x more spaces under management than the rest of the market combined. So we could say we they are well on their way to that goal.[3]

Matterport Overview

Why is Matterport unique?

  • Software company

Although originally in the business for selling 3D cameras, Matterport pivoted to focusing on selling their software instead. Users take out a monthly subscription to use Matterport’s software which takes in 2D images to create 3D visualizations in return.

  • Cloud based

The second important features of Matterport’s business is that it is fully cloud based. This makes it accessible to anyone, from any device. This removes the need to download programs or have specific camera equipment. Users can upload photos from any camera device (including smartphones) and Matterport configures the 3D tour and hosts it on its own servers for anyone to access

  • Artificial Intelligence

Matterport uses Artificial Intelligence as it builds out its platform. Artificial intelligence makes Matterport’s platform gradually better, as over time, their software can correct for things like bad imaging or lighting, but it can also improve the user experience by performing functions like: calculating how many windows are in a room, suggesting placements for safety devices and how to maximize natural lighting in a specific room.

Artificial Intelligence Integration

Competitive Advantage

Ultimately, these three key features mean Matterport can (1) lock in users on a subscription based model, (2) maximize user accessibility and (3) have a product that evolves with user needs. This gives Matterport a competitive advantage amongst its peers and resultingly, they have been able to touch a number of different markets and customers.

Matterport’s Key Customers

Financials

Normally, I would start to discuss future financial projections now but what is apparent about Matterport is that they are already doing exceptionally well.

A quick overview on their financial metrics shows the business is very strong today.

Matterport Key Metrics – Overview

Revenue growth is a whopping 87% y/y, their subscription model has fantastic margins (82%), they have strong growth in users (18x last two years) and surprising for early-stage software companies, Matterport has profitable unit economics as they generate approximately 12x more from their customers than what they spend to acquire them.

Projections

The company anticipates that this momentum continues as they project strong revenue growth and gross margins into 2025 (leading to them turning EBITDA positive in 2024). They expect revenues to grow at 59% compounded between 2019-2025 and margins to be 25% higher in 2025 than they were in 2019. These are very optimistic forecasts (probably the most optimistic I have seen yet).

Matterport Financial Projections

Valuation

Like some of the other stocks I have covered, Matterport is being taken public by a SPAC (Special Purpose Acquisition Vehicle) trading under the ticker GHVI. The proforma shares outstanding after the transaction goes through will be roughly 291m.

As of close on 19th Feb, GHVI share price was $24.46. So the market cap of the business is approximately, $7.12bn.

This implies the following:

2020E: 83x P/S

2025E: 9.5x P/S, 90x Price/EBITDA

Matterport is still trading at relatively high multiples and clearly a lot of that future growth is priced in, particularly evident when you compare Matterpoint’s valuation against other high growth software stocks such as Docusign (67x P/Sales) and Zoom (42x P/Sales). If you assume Matterpoint can reach it’s optimistic 2025 financial projections and trade at a P/E multiple of 40x at the end of that period (to be closer in line with peers), there is still ~25% upside at the current share price over a five year period (workings below)*. This isn’t hugely compelling upside given that it leaves little room for management complacency.

Conclusion

The property market is huge and still remains offline. There is a strong need to digitize the way people view physical buildings online and Matterport is my pick. They have been the first mover/market leader in this segment for more than five years and continue to offer a unique product which has created a strong moat around their business. Future growth is clearly priced in to the stock at current levels and but understandably, given that this is a market with huge potential. I will look to add a position should the stock retrace below $20/share as this would provide a more attractive risk/reward for my investment.

Stock Price (when blog published): $24.46
Verdict: Cautiously Bullish (< $20/share)
Timeframe: 1-3 Years

*$747m in Revenues, optimised net profit margins of 30% = $224m net profit * 40x = $8.964bn over 293m shares outstanding = $30.60/share

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