When I initially stumbled across 3D Printing, I dismissed it as a futuristic and unproven technology, propogated by investors who were trying to offload their positions onto the next naïve Robinhood trader. However, when I purchased my new car a few weeks ago, I was surprised to find out that this technology was actually used in the creation of some of the parts that I now so ferociously admire. So I figured it was about time I gave 3D Printing another look… and I’m glad I did.
How does it work?
Additive Manufacturing (‘AM’), also known as ‘3D Printing’, strikes me as a sort of new industrial revolution taking place in modern, developed economies. There are a lot of tailwinds to this technology in Europe and the USA, as governments (on both sides) are battling to shore up more jobs and prop up structural declines in manufacturing, as these industries have generally moved to places where labor is cheap and regulation is lax, like China.
Put simply, the way AM works is by building objects layer by layer. Imagine a printer but one that makes real objects instead of paper documents. Now imagine connecting this to a computer program so you can design a 3D model, send this data to a machine and get your desired physical object out the other end. That’s how AM effectively works today.
This is unlike traditional or ‘subtractive’ manufacturing, where parts are made typically by casting or machining. In casting, a mold is used to create a specific part (and destroyed when that part is no longer required) whereas in machining, a billet is used to create the desired object. In both instances, the process takes more time, preparation and is inherently built for for mass production.
The 7 different types of AM
AM is a catch-all term for 7 unique technologies. Below is a list of these seven along with my simple explanation and my crude ranking for how they stack up.
Main advantages of Additive Manufacturing
Across these technologies, the key advantages of AM are the following:
- Customization – Allows unique designs
- Rapid prototyping – Saves time procuring machines or casts prior to production
- Advanced geometries – Build intricate designs (particularly lightweight structure)
- AI integration – AM can be programmed to reverse the process of manufacturing from producing a specific structure for a need, to finding what structures fits your need the best
To summarize, AM is increasing sophistication in an industry which has been largely stagnant for decades.
Market size and opportunity
The AM market is split into three key segments, Printing, Parts and Materials. The first two are around 40% each in terms of size of the overall market and that’s where the biggest opportunity lies.
The AM industry has gone through its early stages which is often referred to as Additive 1.0, starting in 2006. Additive 1.0 has seen the market expand from $1bn to over $12bn (20% CAGR). The key feature of Additive 1.0 has been rapid prototyping i.e. taking new complex designs and testing them quickly using AM technologies.
The new phase for this market is referred to as Additive 2.0. During this period, AM needs to prove it can go beyond rapid prototyping and start putting these prototypes into mass production. For me, this is the biggest test for the industry to date as this is something where AM doesn’t generally have a natural advantage. If it can pull it off, the industry is expected to grow from $12bn to $146bn over the next decade (CAGR of 25%).
How does the transition to Additive manufacturing look?
- Bridge Manufacturing
Most factories have minimum order commitments (or producers inherently have to pay this to recoup investment in parts required in casting/machining processes). This poses a high cost of entry for new entrants and as a result, is where AM can make the biggest impact.
The below snapshot is taken from Desktop Metals latest investor presentation (2020). Assuming other Additive 2.0 print manufacturers are as efficient, what this shows is that for production <100,000 units, AM remains the most cost competitive technology. The market opportunity in bridge manufacturing should continue to expand as AM continues to see enhanced efficiencies (e.g. through material waste recycling, faster processing speeds and economies of scale in production).
- Enhanced production
The second key transition that we can see taking shape is what I refer to as ‘Enhanced Production’. There is an inherent disincentive in the traditional manufacturing process to produce complex geometries or shapes in favor of block type manufacturing. This is because it is harder and more costly to impose complex geometries in casting or machining. Nonetheless, the opposite is true for AM; where block printing is actually more expensive (as it uses more material and takes longer to build). In industries where there is a need for lightweight, highly durable and specialized structures, AM has a natural advantage, even at mass production.
Investment Opportunity: Desktop Metal
Desktop metal (DM) sits firmly within the AM space and is currently the only pure play company set to benefit from Additive 2.0. DM’s portfolio is making this transition from prototyping to mid-level or mass production with a particular focus on metal Binder Jetting technology (which I ranked as my favorite technology above).
Currently, they sell three printers (Fiber Q4 2020, Studio System Q4 2018, Shop system Q4 2020) and expect to sell a high-speed mass production system in the 2H 2021 (P1). The focus for DM is on speed of manufacturing and they currently have the fastest metal 3D printing technology (roughly 100x faster than other technologies).
Company Financials
Whilst DM sits in a space which is growing and is likely to experience significant tailwinds from broader industry growth, the thing I like most about this company is the recurring revenue stream.
In their latest P1 Production System for example, cumulative gross margins grow from circa 28% on sale of the initial printer to approx. 58% by Year 10, through the sale of consumables, services and materials. This is truly remarkable and should cement strong Cash Flows and profits as DM continues to expand its order book for 3D Printers. Given the highly specialized nature of AM technology, I would also expect customer price elasticity after the initial sale to be very low (i.e. allowing for greater mark up on subsequent sales). As of now, DM has 90+ orders for it’s Production System through 2024.
Operating Leverage
DM completes its manufacturing through contractors. This has allowed the business to remain asset light and have a high degree of Operating Leverage as it continues to scale its customer base. With strategic investments from Ford and BMW, it has unparalleled access to the automotive industry (Ford and BMW are already using DM’s printing technology). This should lead to continued FCF and EBITDA growth over the next years.
Summary
The AM industry has proven itself to be successful at a localized level having grown at over 20% the last decade and it is set up to continue to grow at a faster speed, as it transitions into mass production. This is a paradigm shift for this industry, going from initially complementing traditional manufacturing to now trying to actively replace it. The backdrop of protectionist agendas in developed economies and more sophisticated, personalized products should act as tailwinds to this sector. The biggest risk here is that it takes longer to play out than planned but for the patient investor, this is great risk/reward opportunity.
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