Exone Buying Opportunities Await
Spencer is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since missing earnings and getting a mulligan from the market, 3D printing company Exone (NASDAQ: XONE) continues to reward its shareholders. Exone shares recently made new highs, tripling from its February IPO price and peaking at $75. Now trading off the highs, partially due to an analyst downgrade of Exone, the time may be coming for risk-seeking investors to initiate a position in the fast-growing company.
Fundamentally, Exone is sound, with great management and a solid balance sheet. Sales growth is phenomenal, and will continue growing at greater than 50% annual rates for the next several years. Profit margins will improve along with sales, and the company will be near break even this year. In 2014 and beyond, huge profits are projected to follow.
While all of these milestones are great for Exone, they are not the reason for the stock's meteoric rise. They are also not the reason to initiate a position now. The real reason is simple supply and demand: there is no public alternative that investors can turn to besides Exone.
No new 3D investment competition
The 3D printing industry still faces a glut of investment opportunities, with investors still being forced to choose from a handful of public companies. Many of the industry's smaller companies are selling out to larger competitors, leaving few alternatives for savvy private investors. It seems as if the entire investing universe wants a piece of the 3D industry, but demand is far ahead of supply.
Body part printer Organovo Holdings (NYSEMKT: ONVO) made a splash this summer by moving from the Pink Sheets to the New York Stock Exchange. This increase in visibility led to a spike in share prices (shares nearly doubled in the days after its public debut, before coming back to Earth). This verified that investors are starved for new 3D printing stocks.
The fact that Organovo has succeeded with such a loose association to the 3D printing industry is remarkable, as it has no projected sales of core 3D printed products for nearly a decade. After its Busch-league pricing of a secondary offer dropped shares by 15%, investors should second guess any new investments into this bioprinter.
The remaining two 3D printer manufacturers, 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS), continue to underperform Exone. 3D Systems and Stratasys shares are both marginally higher since Exone's February IPO, but both lag the overall market, while Exone has tripled in price. This is a clear rotation by investors away from "traditional" 3D printers, which focus on low-margin consumers, toward the high-margin commercial space.
While 3D Systems and Stratasys continue to grow through acquisitions, Exone is building out its own infrastructure. 3D Systems continues a frenzied buying spree, using shareholder equity to purchase a new company every two months on average. Stratasys just completed its mega-buyout of Makerbot, worth at least $400 million. By focusing on acquisitions, 3D Systems and Stratasys may not be paying enough attention to their core businesses.
Meanwhile, Exone is sticking to its plan of expansion by opening new service and sales centers across the globe. Exone is singularly focused on growing its enterprise presence and capturing long-term market share, making smart decisions along the way.
Aside from the current market participants, there are no new 3D companies in the IPO pipeline; investors are stuck with these limited options. At this time, Exone appears to outshine the others.
Individual investors and money managers are not alone with their insatiable appetite for 3D investments--big business wants a piece of the action as well. Most notably, General Electric continues to invest in 3D technologies for prototype parts from dispensing cups within GE washing machines to huge jet engines.
But would it make sense for GE or another suitor like Boeing or Caterpillar to target Exone as an acquisition? Possibly so, based on the amount of R&D that these companies invest in their businesses. GE famously spent $50 billion on R&D in a decade, while Boeing and Caterpillar spend more than $3 billion annually.
If these companies can become more productive by using a tool like Exone's rapid prototyping technology, there could be a business case made for the acquisition. For this reason, Exone is a great value at its current $800 million Enterprise Value. The potential for an acquisition at a much higher value might keep shares rising.
Upcoming events may be entry opportunities
Investors want a part of 3D printing companies. The industry is one of the few with outstanding growth potential over the long-term. As I pointed out, there are no current alternatives in the 3D market that Exone represents. For a company trading at an Enterprise Value to Sales ratio of a whopping 22 times, it is difficult to characterize Exone as inexpensive; smart traders should wait for a good entry point.
Exone releases earnings on Aug. 13. Volatility has been high around these releases in the past two quarters, and if management does not exceed the Street's expectations then shares could tumble. The IPO lockout date expires on August 30th, and over 7 million shares will be available to sell by Exone insiders. This could also create volatility. Use one of these opportunities to build a position in a promising company.
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Spencer Houlihan is long Exone. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems, ExOne, and Stratasys and has the following options: short January 2014 $36 calls on 3D Systems and short January 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!