Two Sides of Matterport

Reflections from a losing and winning bet

A losing bet

Last year, I highlighted my brief experience with Matterport:

In one instance, I bought a business at ~20x revenue and watched it rise to over 50x revenue. I even bought some more on the way up because I felt my thesis was vindicated — the market had recognized I was right. The trouble is my thesis was supposed to play out over 10 years, not 10 months.

Over time, I watched it fall to a (still rosy) ~7-8x sales. I sold out and lost ~70% of the total investment…

The events took place over less than a year from 2021 to 2022. Nothing went wrong with the business. I simply overpaid for the stock and sold when the mistake became a mental tax.

After selling, I didn’t think about the company for a while. It was the first time an investment ended in a substantial permanent loss, and I wanted to escape the pain of such a mistake.

What hurt most was a recognition that I knew I overpaid. Writing around the time of my purchase (on an old Seeking Alpha account), I directly acknowledged the lack of a ‘margin of safety’, before casting it aside as irrelevant in this case:

There is no denial that Matterport is a richly valued company… Such an expensive valuation certainly decreases the margin of safety for any investment, yet I do not believe it impairs the multi-year investment thesis for investors willing to hold through years of a volatile stock price.

Being willing to ignore volatility doesn’t excuse overpaying for the business. Overpaying for the business is a dangerous practice, and this is a lesson learned. In hindsight, the valuation did impair the thesis.

My excitement about the long-term prospects of the business tricked me into thinking otherwise. The problem with my assessment is that any prospects for return were dampened by the years, if ever, it would take for the valuation to be justified by the cash flows of the business.

Put simply, my fear of missing a winner impaired my judgment. Emotional extremes are a danger to good investing. The challenge, and advantage, is in remaining emotionally detached from decisions and results. An even keel is best.

A winning bet

Over time, I accepted the experience for what it was — a mistake. With a few more years investing behind me, I decided to take another look at Matterport. Revisiting the same company with a fresh perspective can offer unique insights.

I did not uncover any unique insights, but I reached largely the same conclusion as a few years prior. The thesis, which centered on the unique compounding value of the dataset, wasn’t wrong. In fact, it had progressed rather smoothly. The mistake was purely in execution — in overpaying.

Most importantly, the circumstances had changed. The stock price now reflected significantly reduced expectations, and with half the market cap in cash, the prospects for return had changed dramatically. I had reason for argument.

I invested again around six weeks ago. Shortly after, CoStar announced it would acquire Matterport. The transaction caught many by surprise, including me, and while the timing was pure luck, true to the thesis, CoStar wanted the data:

Over the years, Matterport has curated what is considered the largest and most precise collection of spatial property data worldwide… Hundreds of thousands of new 3D digital twins for properties around the world are being added to this impressive database each month.

…

We intend to go all in on 3D digital twins, adding more digital twins to Apartments.com, LoopNet, Homes.com, CoStar, Land.com, BizBuySell, Real Estate Manager, STR, Belbex, OnTheMarket and others. We intend to add Matterports as one of the benefits of Homes.com membership. We believe adding 3D digital twins for Homes.com members will increase the leads we deliver, increase customer satisfaction, increase renewal rates, increase sales, and increase site traffic further.

We have thoroughly researched the many 3D digital twin solutions out there and have concluded that Matterport is the best solution for our clients' needs. Given the fact that we intend to make a much greater commitment to capturing 3D digital twins, we decided to capture the value of our increased volumes by acquiring Matterport.

As we make Matterports more ubiquitous, we believe others will buy more Matterports, making the company more valuable. We believe that we can accelerate Matterport sales to non-CoStar Group advertisers by increasing Matterport's investments in sales and marketing.

- Andy Florance, CoStar Q1 2024 earnings call

In the end, the idea played out, though much earlier than I would have guessed, and at a price that would have still resulted in a loss on my original investment.

I won’t explore the acquisition in depth here, but in short, I think it’s a good deal. Matterport shareholders get taken out at a reasonable price (though significantly less than the juicy SPAC price), and CoStar can use its dominant market position to accelerate investment behind a good asset with huge potential.

I sold my stake soon after the announcement. The stock is now on a timer, which runs counter to my strategy of putting time on my side. Plus, I’m happy to deploy that money elsewhere given what I view as an attractive opportunity set today.

A lesson learned

The experience leaves an important lesson. On one end, a bad decision produced a bad result. On the other end, a good decision produced a good result. The difference? Valuation. And a bit of luck.

Valuation is the difference between good and bad returns. Luck plays a role in every investment outcome. These are two rules to the game.

In my process, I look at valuation as a catalyst for action — mostly to buy, less so to sell — but nothing more. I don’t believe much in ‘intrinsic value’. I believe in market efficiency over the long run, and better businesses outperforming worse businesses over time, given a reasonable entry price.

But, disregard valuation, and you rely a whole lot more on luck.

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