Category Archives: Manufacturing

3D Printing Stock to BUY and HOLD for the next 5 years

In my previous write up, I looked at how 3D Printing is set to revolutionize manufacturing, particularly in developed countries. Since my post, we have seen very wild price action in the stocks of the most popular 3D printing stocks. Over the last six months, ‘3D Printing’ (DDD) is up 244% YTD, ‘Desktop Metal’ (DM) is down 33%, ‘ExOne’ (XONE) is up 114% and ‘Stratasys’ (SSYS) is up 13%.

In this article, I want to tune out the noise and take a closer look at these 3D Printing companies. In doing so, I pick out the 3D printing stock which I think will benefit most from this secular growth trend.

Recap on 3D Printing

Firstly, a quick recap on why I am bullish this sector. For the full overview, see my previous article.

Additive Manufacturing (AM), also known as 3D Printing, refers to the process of building products layer by layer, using specialized printing machines. These machines are integrated with computer models which ultimately allow the user to turn digital images into physical objects.

This is in contrast to traditional manufacturing methods where objects are either formed by; (1) Subtraction, whereby you take a block of material and subtract the bits that you need, or
(2) Forming, where molds are injected with material to produce a specific object.

Advantages of AM

The Benefits of 3D Printing

There are a few key benefits associated with AM. These include:

Personalization – Unlike with traditional manufacturing, AM lets you create niche and specialized products at any scale. Even the smallest of changes to design can be programmed directly into the production process and this doesn’t require new parts. This is particularly advantageous in industries where parts need to be tailor made (e.g. medical devices)

Speedy Prototyping – In a similar vein, 3D printing allows new products to be created effortlessly without waiting on parts to be made prior to production. This makes it quicker to prototype and to test designs which is vital during the early stages of production

Complex engineering – 3D Printing can create more sophisticated designs than traditional manufacturing methods (which generally tend to be block shapes). Some of these designs include complex lattice structures (like the one below used in an automobile gear box). Such shapes ultimately allow for lighter (and more cost efficient) structures to be created

3D Printed lattice structure used for Automobile Gears

Supply chain optimization – Traditional manufacturing is either very labor intensive or very land/material intensive (and sometimes both). This has made it more prevalent in developing countries which are generally more cost competitive on both fronts. Whilst this can be a good thing (especially for consumers that benefit from cheaper prices), it does pose supply chain issues, which we all felt during the COVID pandemic as cross border flows were negatively impacted. Ultimately, the mobility of 3D printing means that supply chains can be shored up in developed countries, especially for time critical supplies (such as medical and industrial equipment).

3D Printing is set to grow exponentially

Although the technology has been around for over 30 years, 3D Printing is still in it’s very early stages of growth.

The Global 3D Printing industry is only worth around $13bn currently (measured by printing machinery and service revenues) but it is expected to grow at a 60% CAGR for the next five years (and at 25% CAGR for the next 10 years). (Even the lowest growth estimate I found online was assuming 20% CAGR for the next 10 years). This ultimately means that the industry is going to grow from being worth $12bn today, to over $125bn by end 2025.

3D Printing Growth Trajectory

Additive Manufacturing 2.0

The reason this industry is set to grow so fast is because it is going through a disruptive phase right now. Whereas initially 3D printing was used exclusively for prototyping (complementing traditional manufacturing), it is only now starting to compete with mass production. This is what is referred to as ‘Additive Manufacturing 2.0’.

This competition with traditional manufacturing is being fought on three fronts:

  • Mass production technologies
  • Expansion in materials inputs
  • Production of end-user parts

Resultingly, the most successful 3D printing company will be one which has the best technology to mass produce parts, has the widest selection of materials and that can be used directly in the creation of end-user parts.

3D Printing has low penetration with end-use parts
3D Printing Addressable markets

Market Players

There are many companies operating in the 3D printing space. However, the biggest pure-play 3D printing companies that are publicly traded are: 3D systems (DDD), Desktop Metal (DM), ExOne (XONE) and Stratasys (SSYS).

Whilst these companies have a lot of similarities, this is how I would characterize them versus one another.

3D Systems: The Dominant Player

3D systems is the largest company (by market cap) and is the self-proclaimed leader in the 3D Printing space. They have been around the longest (around 35 years) and are generally considered a legacy producer with a metals, polymers and plastics 3D printing businesses. In recent years, they have tried to build out their regenerative medicines business and have signed numerous partnerships to do so in this space. They have 100+ materials under patent.

ExOne: Legacy Binder Jetting Printing

ExOne is the market leader in legacy Binder Jetting 3D printing technology (which uses a binder to effectively glue together the different layers of material used to create parts). They have been in the industry for 20 years. They have 230+ materials and have the largest market share of Binder Jetting based 3D printers, globally.

DM: New kid on the block

DM is the disruptor in the industry. Whilst initially a metals focused 3D printing business, they have developed their polymer business through acquisitions this year (Envision Tech and Adaptive 3D). They also boast the fastest Binder Jetting technology in the market, which they refer to as ‘Single Pass Jetting’. This is about 7x as fast as the legacy system (used by ExOne). They have 225+ materials and very strong VC backing (Ark Invest, Social Capital, Ford, Google Ventures).

Stratasys: Legacy polymer 3D printing

Stratasys is focused on polymers (mostly plastics) printing (and not metals printing). As a result, they use slower (legacy) technologies for their 3D printing machines (FDM technology) and have a more limited customer base. They have been around for 30 years.

Financials Comparison (COB July 5th)

Financials Comparison

Revenue Growth

Firstly, all four companies are expected to grow revenues considerably this year. That being said, the Revenue CAGR for the largest players has actually been negative (over 3-5 years). This tells me that they are conceding market share to new entrants (and likely at a considerable rate given how quickly the industry is growing).

Cash Rich

Second, all four of these businesses have a lot of cash. The cash on balance sheet covers free cash flow for these companies for at least the next 4 years. This means that despite having negative Free Cash Flows (due to high capex spend and lower revenues), these businesses can likely maintain operations without dilutive equity fund raising rounds.

EV < Market Cap

Finally, I see a lot of people look at Price to Sales (or Price to Earning) multiples for stocks. With businesses like these which have a lot of cash on the balance sheet, this is the wrong approach. Enterprise value (which accounts for market plus debt minus cash), gives a more accurate picture of how these companies are valued. Intuitively, the enterprise value is what you’d pay for a company if you tried to buy it entirely (i.e. you own the equity and the debt). On this basis, all four companies trade still trade at a sizeable premium to forward expected revenues (but this is no way near as overvalued as typical P/E multiples would imply).

My Stock Pick: Desktop Metal (DM)

DM appears to fit my requirements the best. Financially, they are experiencing the fastest revenue growth and although they trade at the highest multiple of sales (EV/Sales), their growth is coming at the expense of the legacy entrants (that likely cannot compete with DM’s proprietary technology, such as the Single Pass Jetting System).

DM also has the strongest balance sheet. This is a reflection of the strong VC backing DM has (which has allowed it to achieve a sizeable valuation very early on). This protects the business from likely continued negative Free Cash Flows as it invests in its business during this growth phase. At this rate, DM has at least 7 years of cash to fund it’s Free Cash Flows.

Investment Risk/Reward

Assuming DM can achieve revenues in line with market consensus estimates for the next two years, continue to grow in line with broader industry growth (circa 60%), and achieve optimized margins of 20-30% (its competitors are already achieving 40% Gross Margins), I do think DM has the potential to achieve 90% return in the next five years (assuming a relatively low 20-25x earnings multiple).

It is worth highlighting that a lot of these assumptions are ‘de-risked’ as due to its order back-log, DM can already have a high level of confidence in its Forward Revenue Guidance (which is to clear $100m this year and achieve $1bn in revenues by 2025). In fact, the company has already sold out its printing machines until the 1H of 2024 (making me more confident that these revenue figures will be achieved). In the bear case scenario where growth rates and margins lag , I see 29% downside from the current share price.

Conclusion

3D Printing is still in its very early stages of growth. However, DM offers an opportunity to invest in the future and to achieve outsized returns versus it’s competition. Given that there is still a lot of growth to be felt, the price action is likely to be extremely volatile until we see continued revenue growth (likely Q4 of this year when DM’s new printers begin shipping). That being said, for the long term investor, I think DM offers an unrivalled investment opportunity.

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Ticker: DM
Stock Price (when post published): $10.87
Verdict: Moderately Bullish
Timeframe: +5 Years

Ecommerce Stock with explosive upside?

The global retail market is growing at 14% annually and it’s not close to slowing down. Even in 2020, an abysmal year for the US economy, total US retail sales grew by 7% (vs 2019), which in fact was the highest annual growth recorded since 1999.

Ecommerce leading the way

The key driver of this growth in retail sales is online ecommerce. In 2020, ecommerce sales accounted for 101% of the growth in total sales (it’s over 100% because it also off-set declines in catalog/call center sales). This was the first time in history that ecommerce sales growth accounted for all of the total retail sales growth (the last time it got close was in 2008, when ecommerce growth accounted for 63.8% of growth that year).

The pandemic clearly had a lot to do with this. When you’re under lockdown and need essential supplies, online retailers like Amazon prove to be extremely useful. This trend also incentivised traditional retailers to step up their online presence to keep up.

US Ecommerce penetration is still in its early stages

What’s surprising however, is that even after accounting for the pandemic led boost, ecommerce penetration in the US still isn’t very high. In China, 45% of all retail sales are made online today, and that’s expected to reach approx. 60% by 2024. Meanwhile, in the US, this is closer to 21% (pre-covid, this was 15.8%). The global average, which includes countries where infrastructure is lacking, is 18%.

For the US to only be 3% above the global average is pretty shocking, especially as the US economy is largely consumption driven (70% of GDP) and is still a global technology leader (fast internet speeds, high level of tech integration, mobile adoption etc.). This tells me the shift to online retail is still very much in its early stages in the US and whilst it is a global trend, the US is prone to a much faster rate of ecommerce adoption than most other countries.

US Ecommerce Penetration
Chinese Ecommerce Penetration
Global Ecommerce Penetration

There is sizeable room for new entrants

Amazon effectively has a monopoly on online retail in the US. It accounts for around a third of all online sales (around 7% of total retail sales). Nonetheless, as the ecommerce market continues to expand, Amazon is having to concede market share. Some of this market share is going to other established retailers that have geared up their online presence but it’s also going to local businesses that have only just started to transition online (made more convenient through channels such as Shopify, Etsy and Amazon marketplace). In 2020, the top 100 retailers had a 74% share of total ecommerce sales compared to only 49% in the previous year. On Amazon, now more than 60% of their sales are fulfilled by Third Party Sellers (hosting on Amazon’s marketplace). This speaks to how increasingly fragmented the market is becoming.

3rd Party Sellers on Amazon
Biggest online retailers in the US

Short term Tailwinds?

One frequent criticism I hear is that as the US comes out of the pandemic we will see a reversal in the trend towards ecommerce. The theory is that as people are allowed out, they will go back to buying things in person than online. Whilst I think this may be true for some purchases as people are no longer forced to buy almost everything online, I think there are two tailwinds that will keep us going.

The first is the sheer size of pent up demand, combined with rising personal incomes. No matter how you cut it, personal incomes, disposable incomes, personal debt/income ratios, all point to the US consumer coming out of the pandemic stronger than where they went in. This is mainly being supported by the size of stimulus but also because people spend less overall when they are under lock down (less Starbucks coffees, commuting, nights out etc). So whilst we may see some things being purchased in person as opposed to online, the sheer size of the amount of spending we are going to experience is likely to lift the entire sector (and therefore, in absolute terms ecommerce sales will continue going higher).

The second is a cultural shift. We can argue that you might order less takeout and eat out more, but the convenience of online shopping is evident. Many of these habits are likely to be sticky; if you’ve tried it once, you’re more comfortable with the idea of doing it again. This is creating a secular trend in the market towards online retail.

Mohawk: Ecommerce disrupter

Ok so enough big picture stuff. I know ecommerce is a sector with structural growth, low current penetration and short term tailwinds. But what I want to know is which companies will be potential multi-baggers because they are truly disrupting the industry.

This is when I came across Mohawk (Ticker: MWK). They are a pure play ecommerce business but they have focused on two particular aspects of the future of the ecommerce market; increased fragmentation and low technology integration for entrants. They have three key USP’s that are focused on these structural trends.

  • AIMee Proprietary Tech Platform

Mohawk hosts a tech platform called AIMee. This replaces some of the old fashioned, inefficient aspects of the retail business with a far superior tech based alternative. AIMee allows MWK to understand their customers better; it analyses customer feedback (through NLP) to quickly identify what customers like/don’t like (through text based reviews), it computes market trends by monitoring the features that the best-selling products have, and it optimizes pricing/logistics based on consumer feedback. These are not new ideas but their proprietary tech platform allows MWK to do these things more efficiently than others using a combination of Artificial Inteligence and programming.

This type of bottoms up analysis has become particularly important in markets with low brand loyalty (think iphone cases, essential oils, kitchen appliances). This is because by focusing so closely on the data from customers, MWK can get a bigger slice of the market share. I was surprised to find out that only 22% of searches on Amazon have a brand attached to them, and 51% of millennials have no preference between private label and national brands.  This nonchalance towards major brands is a key driver for MWK’s growth, because they can then use their technology to gain a competitive edge.

AIMee Technology
  • Reducing Go-To-Market Time

The second aspect of Mohawks business is one which I didn’t initially consider. A typical product takes around 18-24 months to go to market. The key hindrances that traditional retailers have is that they have to initially research/test the product and find distributors. Mohawk can use their AIMee platform to cut this down to 6-8 months, by replacing these two roles with a technology alternative.

Instead of having focus groups, AIMee can identify what’s trending and therefore, become an idea generator. This reverses the traditional role of product origination; instead of asking customers what they like, the AIMee platform tells you what customers are going to like. Similarly, the trading engine can figure out the optimal go to market strategy (inventory, pricing, product lifetime management).

For products which rely on a lot of hype (think fidget spinners, kids toys, smart gadgets), being the first is key to profitability. Most users will buy the item, use it for a short while and then move on. I see AIMee is helping to find this product.

Anecdotally, I know time how critical time to market can be. I launched a repair app (www.fixlee.co.uk) late last year and even whilst I’ve been busy making new iterations/testing the beta, I’ve seen multiple new players pop up trying to do the same thing that I am with my repair app.

  • M&A strategy

MWK traditionally relied on organic growth to fund their business but as more ‘mom and pop’ businesses have been set up, MWK has found it more cost effective to pursue an aggressive M&A strategy to integrate these businesses under their technology infrastructure (than to establish brand new businesses). The competitive edge for MWK remains their tech (by acquiring more businesses, they can spread a fixed cost over more products) but they have also proven to find very attractive M&A deals more broadly, buying companies at 3-4x EBITDA. Since 2020, they have already added 1000 different products and have 40 new product launches. The pool of potential acquisition targets is expected to increase with third party sellers expected to grow at 16% CAGR over the next five years.

Business financials

I had two concerns with the MWK business model that I wanted to see addressed in their financials. (1) Whether their tech had proof of concept in being able to generate incremental sales (2) their ability to scale their M&A strategy.

MWK have increased revenues every year since 2017 and expect to have 50% CAGR in revenues over the period 2017-2021. In the latest estimates, MWK forecast a 100% y/y increase in revenues 2020/21. They have also managed to turn this incremental revenue into growing EBITDA margins which turned positive for the first time last year. This shows the business is able to sell more and is now starting to return profits (using EBITDA as a proxy).

With regards to their M&A strategy, MWK have some attractive businesses they have managed to acquire which has helped to cement their ecommerce position. The good thing about this is that they’ve managed to add more businesses with generally no additional headcount and with a very quick turnaround time (~48hours to integrate), which speaks to their competitive advantage.

  • Healing solutions (31 Oct 2020) – 3.8x TTM EBITDA, 3300 products
  • Smash acquisition (30 Sep 2020) – 3.7x TTM EBITDA, 43 products
  • Truweo (8 April 2020) – 2.5x TTM EBITDA,

Valuation

Now I know what you’re thinking? Why do all of this analysis to buy an ecommerce tech business. Just buy Amazon, right? Strong, steady, growing….

This is where I think it gets interesting. I want to find the businesses with the best risk/reward and big upside. Call me skeptical but I struggle to see Amazon being 2-3x in the next 5 years (if Amazon doubled from where it is today, it would have a market cap the same size of German GDP)…This is where high growth, small cap stocks, become more interesting.

Here’s a quick and dirty optimised margin model on MWK.

Let’s start with Revenues. MWK experienced 62% growth 20/19 vs 100% forecast 21/20. Their 2021 Revenue guidance is between $350-$380m, and their long term optimized margin forecast is around 13-15%.

Basis achieving a long run operating margin of 13-15%, this implies earnings of $36-$45m. Assuming the business can grow in line with the rest of the market (i.e. 16%-24%), this implies 2025 Revenues of $735m-$1.14bn. Assuming the business is valued at a Price/Earnings multiple of between 10-20x, I am seeing 189% upside against 17% downside risk, with base case upside of 65%, at current prices (as of COB March 15).

Conclusion

Ecommerce is a secular trend that’s here to stay. As the market continues to grow, new entrants will emerge and MWK is providing fundamental value through its proprietary technology platform, AIMee. By being able to do things more efficiently, the company has strong growth prospects which it has shown through aggressive M&A expansion, consistent revenue growth and speedy product integration. I’m bullish the entire sector but I see this as a potential multi-bagger, that’s disruptive, consistent and trading at a good entry point.

Ticker: MWK
Stock Price (when post published): $30.38
Verdict: Bullish
Timeframe: 5 Years

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

3D Printing: Turning Science-Fiction into reality?

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.

Verdict: Bullish
Timeframe: 5-10 Years