A 3D Printing Stock With Diversified Business Lines
The herd behaves in strange ways. Last time we looked, data science stock Alteryx was down -40% because they revised guidance. Like that was some big shocker. We all know about “the rona.” We know the entire global economy has taken a dramatic productivity hit. Yet, we all act surprised when a company revises guidance or reports lower than expected revenues.
A few weeks ago, 3D printing stock Materialise (MTLS) closed down -15% because Wall Street didn’t think their second quarter earnings were up to snuff. While the stock has rebounded since, we decide to take a closer look at this Belgian company which offers some diversified exposure to the 3D printing theme.
Founded in 1990, Belgium-based 3D printing firm Materialise is one of the original pioneers of 3D printing. The company became publicly traded back in 2014 when 3D printing stocks were all the rage. Since that IPO, shares have returned +125%. Sounds impressive, right? Not when you consider that simply investing in a broad-market Nasdaq ETF would have returned +238% over the same time frame. (This is why it’s so important to always compare returns to a benchmark.) Still, when you consider how bad other 3D printing pioneers have performed over that same time frame like Stratasys (-87%), 3D Systems (-90%), or Xone (-75%), Materialise hasn’t done half bad.
Since past performance is no indicator of future performance, we want to assess the potential of this $1.37 billion company based on what we know today. Let’s start by looking at what exactly they do.
What Does Materialise Do?
The first thing you’ll notice about Materialise is how well diversified they are by product line and geography. The company divides their business into the three segments listed below (percentages represent contributions to 2019 revenues):
- Medical – 31%
- Software – 21%
- Manufacturing – 48%
Let’s briefly review each segment.
The medical segment is further divided into two sections – software and medical devices – which account for 32% and 68% of the segment’s total revenues respectively. The software they sell is a suite of applications that relates to medical image-based analysis and engineering as well as patient-specific design of surgical devices and implants. As for devices, they have 32 dedicated 3D printers producing medical devices. The majority of the medical devices that Materialise printed in 2019 were surgical guides (and related bone models) that were distributed to surgeons through their collaboration partners.
Materialise builds a software suite that enables their customers to more efficiently organize the entire workflow of a 3D printing operation with multiple 3D printing machines, many operators, and complex data flow and logistical requirements. Their software is compatible with nearly all 3D printing systems.
The largest segment, Manufacturing, offers 3D printing services to industrial and commercial customers, the majority of which are located in Europe. Materialise service centers operate 149 3D printers, six vacuum casting machines, and 20 CNC machines that produce both prototypes and production parts. In order to meet specific customer needs for very large printed parts, they developed Mammoth, their own proprietary stereolithography technology. Fifteen such printers produce parts for their clients.
Overall revenue growth for Materialise seems to have plateaued in 2019, and is certainly not going to set any new records in 2020.
In drilling down to the segment level, we can see that Manufacturing suffered a small decline in revenues from 2018 to 2019 which Materialise attributed to “the softened macro-economic environment.” This is discouraging when you consider that in October 2017, Materialise acquired ACTech, “a full-service manufacturer of complex metal parts.” The below statement is telling:
Revenue from our Materialise Manufacturing segment increased from €63.7 million in the year ended December 31, 2017 to €95.0 million in the year ended December 31, 2018, representing an increase of €31.2 million, or 49.1%. Revenue from the ACTech business that was acquired in October 2017 contributed €43.4 million in 2018.
Back of the napkin math tells us that their manufacturing segment shrunk 19% in 2018, something that was masked by the purchase of ACTech. The fact that the combined Manufacturing segment then declined again in 2019 implies that whatever growth ACTech is realizing (we only assume they acquired a business that was experiencing strong growth) was offset by a decline in their original manufacturing activities.
One of the biggest players in on-demand manufacturing right now is Protolabs (PRLB), the self- described “world’s largest and fastest digital manufacturer of custom prototypes and on-demand production parts.” In 2019, Protolabs also saw overall growth slow while their 3D printing segment grew 15%. The two companies are competitors, but Protolabs is much more focused on the United States at the moment which is where 78% of their 2019 revenues came from (about $360 million). If we look at the 2019 revenues Materialise brought in from the United States under their Manufacturing segment, that number is around $15.9 million or about 8% of total revenues. In regards to Protolabs operations in Europe, they brought in $82.8 million in 2019, while the Materialise Manufacturing segment brought in $75.3 million.
With Manufacturing being their largest segment, Materialise will need to consider how they plan to compete against the one-stop-shop business model that Protolabs has developed that not only offers 3D printing but also CNC machining, injection molding, and sheet metal capabilities.
Having a diversified set of business segments will help protect Materialise against external factors that may affect one segment but not the others. Still, the slowing growth of the manufacturing segment is a concern given the formidable competition they face from Protolabs on their home turf and abroad.