Bet on This Longshot to Win the 3D Printing Race
Spencer is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
3D printing, or additive manufacturing, is the hottest industry going, with arguably the best growth story in the market. Momentum traders and institutional investors spent 2012 cashing in on lucrative bets on Stratysys (NASDAQ: SSYS) (+86% in the last 52 weeks) and 3D Printing (NYSE: DDD) (+148%). In early 2013, retail investors are joining the party, driving shares to new all-time highs, and creating a dot-com like bubble feel in these two stocks. But a new challenger, The ExOne Company (NASDAQ: XONE), has joined the race, and is a longshot to take the 3D printing crown.
ExOne debuted in January to great welcome from investors, and lucky IPO shareholders were rewarded with a gain of nearly 50% on the first day. Since then, shares are mostly flat, as investors got to know the new kid on the block. Non-believers of ExOne have reason to believe that the company won't succeed. With the worst financials in the industry, ExOne sold a total of four 3D printers in 2011. EBITDA is negative, as sales have not caught up with fixed spending on R&D and sales force expansion. Even with these glaring negatives, there are three hidden areas that may give ExOne's stock price a boost versus the competition: a differentiated market segment, superb connections, and a low valuation.
ExOne does not sell 3D printers to individuals, nor do they plan to enter this segment of the marketplace--and for good reason. Consumer 3D printers have very limited current use, are very slow, and are not nearly as profitable as larger enterprise printers. Thus far consumer 3D printers have managed to produce game-changers like iPhone cases and plastic animal replicas. By focusing on business customers, where there will be a long-term need for 3D printers, ExOne will avoid dealing with complex supply chain and retailing issues, and will remain focused on satisfying larger, more profitable customers.
By comparison, 3D Systems sells desktop printers for at home use for as low as $1,299. According to 3D: "We are extending the range of our affordable printing solutions from the automotive and entertainment industries to middle school classrooms and garage-entrepreneurs." There may be some low-end consumer adoption, but how profitable are middle schoolers and garage-entrepreneurs? With limited realistic consumer use, the long-term profitability of additive manufacturing will be the business customer, squarely in ExOne's target market.
Coveted Connections and Customers
CEO S. Kent Rockwell leads the list of high-powered individuals and institutions that are connected to ExOne. An heir to the Rockwell International fortune, Rockwell saw the promise of 3D printing in 2007, acquiring Extrude Hone after the death of the company's owner. With his background as a venture capital investor, he realized the potential of Extrude Hone's 3D printing technologies for business and took the opportunity to form The ExOne Company. As the majority owner of ExOne, he is poised to do what venture capitalists do best: make money by creating shareholder value.
Rockwell is more professional and seasoned for Wall Street than his rival CEO's, who have stumbled recently. 3D Systems CEO Abe Reichental recently approved a stock split on the same day as 3D's earnings release, which caused confusion among investors and lead to a temporary slide of almost 20% in DDD shares. Next, Reichental irked Wall Street analysts by reporting quarterly financials less than half an hour before the conference call. Analysts were not prepared and there was clearly tension between analysts and 3D Systems executives. It would be difficult to imagine a seasoned veteran like Rockwell making such strategic mistakes.
Rockwell has created a network of customers and university partnerships that will put ExOne in the best possible situation to succeed. Customers already include blue chips Caterpillar, Boeing, and Ford. ExOne is also cozy with the prestigious university MIT. As disclosed on the "Intellectual Property" section of their prospectus, the partnership with MIT lasts through 2029 for certain patents, while others expire in 2013. As ExOne continues to spend nearly $2 million annually on research and development, being associated with the best and brightest researchers in the world will keep ExOne's technology ahead of the competition.
Low Enterprise Value
The market is giving ExOne little respect compared to Stratasys and 3D Systems in terms of enterprise value. ExOne is valued at under $400 million, while Stratasys is $1.8 billion and 3D Systems is at nearly $3 billion. When expected growth is factored into the equation, ExOne looks even cheaper, as analysts expect ExOne to grow revenue at around 60% next year, versus 25%-30% growth for Stratasys and 3D Systems. Granted, both rivals are profitable while ExOne is not, but paying a 5 to 10 time premium is not justified.
It has been said that investors are doing "backflips" to get into one of the few 3D investments. Typically, this type of mania correlates with market tops and is not the time to invest. Anyone looking to get into this space should carefully consider the risks and invest only as much as he or she feels comfortable losing. But for the risk-on investor, ExOne is the most compelling story in the 3D printing industry. Just make sure you're using your longshot money.
houlijr8 has a position in ExOne. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!