In markets that seem almost bipolar, with the long sustained rally of 2013 followed by a sharp correction in biotechnology and technology stocks in 2014, finding a reason for the wild gyrations of stocks becomes increasingly difficult.
In this environment understanding the fundamental aspects of the business, rather than focusing on the day to day stock price fluctuations is the way to identify the best opportunities and avoid those that will lose your capital. With that in mind, today we are looking at the business model, financials and company specific factors relating to The ExOne Company (NASDAQ:XONE).
The Business Model
ExOne is a company that floated in early 2013 as one of the first companies to test what turned out to be a bull market in IPO’s for tech related stocks. A glance at their stock price chart for their short listed history shows the swings and roundabouts of that journey so far.
The business of ExOne is the manufacture and sale of 3D printers. They are targeting several segments with their product lines. The first, (such as the picture ExOne M-Print) is aimed at specialist engineers and builders who require both the software (design programs) and hardware (the 3D printer) to design and print parts for unique or prototype purposes.
The second product line, like the ExMicro Orion printer, is a highly accurate to the last millimeter machine using cutting edge technology and lasers to modify both conventional and non-conventional production materials on a micro scale. The Orion machine sells for approximately $1.0 million, the first of which was sold to a production customer in 2013. Alongside their machinery, ExOne provides the consumable raw materials needed to manufacture and print the final products, servicing of their machines including replacement parts, and a service suite that comprises technical support, training and consulting.
Sifting through the recent financials of ExOne shows a promising company, albeit one coming off a low base. Revenue for the year 2013 grew +38%, but the headline figure was a relatively small $39.5 million. This is not surprising given the total machines sold for the period numbered only 29. ExOne’s client base is diversified with no customers for 2013 or 2012 individually representing more than 10.0% or greater of total revenue.
Encouragingly, these results were in line with the stated strategic goals of the IPO and pre-listing documents, an indication that the management team is conservative and not prone to over-promising.
Also encouraging was the strong margins of 39.4% achieved, which translated to a gross margin figure of $15.6 million. General administration expenses fell substantially by over $2 million while research and development expenditure more than doubled to $5.1 million, showing that the company is simultaneously managing costs and investing in all the right places.
While these numbers ultimately reconciled to an operating loss of $5.7 million, that is to be expected of an early stage technology company in the growth phase which is investing heavily in their future growth prospects.
The company actively targets different markets by region and industry segment. In relation to their geographic diversification strategy, ExOne currently operates in North and South America, Europe and Asia, with their headquarters in Pennsylvania. In 2013, 63% of revenues were derived from transactions outside the United States. For a company founded less than a decade ago in 2005, this is an impressive level of global reach.
In terms of industry spread, ExOne has a focus on high margin and technical industries that require innovation and high levels of research and development to compete. As a result, they actively target companies and firms in the aerospace, bulky equipment, transport and energy sectors. This opens up a wide breadth of target firms, from defense contractors and car manufacturers to the literally thousands of oil and gas services companies that have emerged to service the recent energy boom.
Building productive relationships with these firms and offering strong after sales service is a good way for ExOne to build revenue and profitability.
However, the other main plank to their continued growth will be a strong research and development pipeline that delivers products that their target market demands. Strong relationships with their customers could help identify gaps in their capabilities that ExOne can then service.
ExOne (XONE) is an interesting company at an early stage of its growth and listed history, competing with longer established and larger players. If it can focus on the requirements of it’s clients by building relationships and delivering products that serve those needs they may be able to carve out a profitable niche in the high growth 3D printing market, and lay the foundations of a successful business model in the long term. The latest stock price slide of ExOne (NASDAQ:XONE) may provide a compelling entry point to invest in the ExOne story.