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Deciding what to write about here on Nanalyze is pretty easy. We cover 51 different technology themes and there are 52 weeks in a year. One a week, job done. When it comes to Nanalyze Premium articles, we focus on stocks and ETFs that provide exposure to these themes with emphasis on the 28 stocks we’re holding ourselves. With a special purpose acquisition company (SPAC) being launched every minute, we’re faced with some new decisions. Which SPACs do we cover? The answer is the ones with revenues.
We’ve warned about how SPACs do retail investors no favors, and every new SPAC is an opportunity to repeat that warning. There are a few exceptions to that rule, and the SPACs we’ve spoken favorably about all have one thing in common – meaningful revenues. Check it out:
Today, we already see about 30% of our revenue generated through a stream of recurring revenue consisting primarily of consumables, service and software.Markforged
About Markforged Stock
We last talked about Markforged in our piece on Ten 3D Printing Startups That Took Funding in 2019. They were also among our list of 7 of the Most Funded 3D Printing Startups in 2017 and more recently in our featured list of 10 Powder and Binder Metal 3D Printing Companies. In short, they’ve been coming across our radar a lot, and we’re sorta bummed because they’re another attractive company choosing the SPAC route instead of a proper initial public offering. It’s like when you see the shy innocent girl you have a crush on riding on the back of some tattooed guy’s Harley. You know she could have done so much better than that, but you also know why she finds jerks appealing.
The Markforged SPAC is a bit more confusing than usual. The company they’re merging with is one. Yes, small letters and italics because that’s how they roll. This makes it rather confusing because that’s not what their ticker is – something that would actually make sense. Maybe that’s what the lower case is telling us? Who knows, but the real ticker is AONE and it’s trading at $12.75 a share. (That’s only a +27.5% premium since the announcement instead of the usual triple-digit shite.) Since the vast majority of SPACs all trade at $10 a share, it’s super easy to see which ones are being hyped to the moon (QuantumScape, cough, cough.)
On the conference call to investors announcing the deal, the CEO hits on all the right talking points. They’re cost-conscious having spent only $80 million to get where they are today while projecting profitability in four years. They have a solid set of big-name customers across a swath of industries.
And in 2019, they realized $73 million of revenues, having realized a compound annual growth rate (CAGR) of +70% since 2015.
Predicting your growth will continue on the same trajectory is a whole lot more convincing than the dreamers who predict triple-digit CAGR for the next five years and have squat for revenues today. Let’s talk about what Markforged does to bring home the 3D-printed bacon.
What Markforged Does
Markforged’s AI-powered and intuitive additive manufacturing platform, The Digital Forge, is comprised of both hardware and software that takes 3D printing to the next level. Their metal and composite printers utilize a wide variety of materials such as their proprietary continuous Carbon Fiber Reinforced (CFR) composites.
The customer success stories they offer in the deck focus on “cost savings” and “printer payback period,” metrics which help sell a solution regardless of how the market is behaving. Here are some examples of how customers are finding values in Markforged’s industrial manufacturing platform and consequently increasing their adoption:
- Dana is a $3.5 billion manufacturer of drivetrains that was able to build a tool for axle manufacturing at 10X the speed using 4 Markforged printers. They now use 23.
- The USMC adopted two printers and realized $270,000 a year in cost savings by creating a tool for field repair. The first printer was paid back in three months and they now operate 29.
- FritoLay used a Markforged printer to build a tool for their automated assembly line which reduced costs by a factor of 45. The printer paid for itself in nine months and they now operate 35.
As we’ve seen with other 3D printing and robotics companies, complexity is moving to the software layer where big improvements can be realized. Markforge highlights the improvements they’ve been able to make using software alone, as their manufacturing platform analyzes the data from printing over 10 million parts to continuously improve itself:
As we discussed in our recent piece on 5 Small Global Stocks With FDA Approved AI Algorithms, it’s kind of a given that companies today use AI to do whatever it is they do better. Markforged makes it a point to emphasize their use of AI, but that should be the norm these days, not the exception, especially when it comes to additive manufacturing.
The remainder of Markforged’s investor deck focuses on the size of the Additive Manufacturing 2.0 opportunity, the experience of their management team, and the usual comparables stuff including the following slide which includes 3D printer maker Desktop Metal:
The market cap comparison above uses a share price of $22.58 for Desktop Metal. If we back that out to $10 per share then it’s a bit better – Desktop Metal at $2.6 billion and Markforged at $2 billion market cap. That’s a pretty weak way to compare the two companies though, and we’re more interested in the company which presents the least amount of risk.
Desktop Metal vs. Markforged
Desktop Metal is the only SPAC we’ve invested in so far. It certainly hasn’t been a sleep-well-at-night stock, soaring into the triple-digits because of little more than hype. As we’ve been telling our premium subscribers, we’ve been trimming our position and have now recouped 64% of our cost basis. The appeal of DM is their master plan to consolidate the disparate “3D printing industry” through some key acquisitions. They’ve started following through with that with the acquisition of EnvisionTEC which gives them volume production polymer capabilities.
One problem with SPACs is that they don’t provide enough information for us to make an informed investment decision. For example, most SEC filing documents provide you with commentary on how concentrated revenue streams are. Markforged has $70 million in revenues across 10,000 facilities with an incredibly diverse client base. We’re immediately interested in knowing if any customer constitutes more than 10% of their revenues, a very critical piece of information for risk-averse investors that’s missing here. In the CEO’s letter, he talks about filing an S-4 which should contain some of the missing details we’re looking for. Until that document is filed, we don’t have enough information to make an informed investment decision here.
On the topic of share price premium, we’re not paying much more than institutional investors did, regardless of how great the company is. We paid a 14.5% premium for our Desktop Metal shares ($11.45 per share cost basis) which was too much frankly. Why should we be having to pay a premium at all? We’re not buying Markforged shares at a premium of 27%, no matter how great the company is.
We can’t blame any founder for deciding to make hay while the SPAC sun shines, but they do a disservice to long-term investors who don’t want the volatility associated with SPACs. To be fair, the hype that affects SPACs also affects IPOs, but there’s still the information problem. If we had a proper S-1 for Markforged and Desktop Metal, we could have made an informed decision as to which company we’d prefer to hold. Sure, we could hold both, but we’re more interested in the company that presents the least amount of risk. When these companies start producing some 10-Qs and 10-Ks, then we’ll be able to better compare them to make sure we’re holding the best one.
The SPAC deal is expected to close in the summer of 2021, after which time, shares will trade under the ticker “MKFG.”
We’re presently holding Desktop Metal as one of three 3D printing stocks in our portfolio. Want to see the rest? Become a Nanalyze Premium subscriber and find out today.
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