Metal 3D Printing Stocks: DM vs VLD vs MKFG
Investing in disruptive technologies sounds easy on paper. First, you identify when a technology moves from being emerging (team-with-a-dream) to disruptive (meaningful revenues growing quickly). Second, you find the leader(s) and invest in them, trusting that economies of scale will benefit the biggest fish in the pond. But things quickly become complicated when the technology doesn’t evolve as planned.
Originally, 3D printing promised that every household would just print stuff as they needed it. Then, it changed to a 3D printer on every block that everyone would use as needed. Then, we realized 3D printers were largely being used by hobbyists, and that the Chinese can always build things cheaper. That’s when we started moving up the value chain to bioprinting, distributed manufacturing, and 3D printing with metals.
The Metal 3D Printing Thesis
In the scope of this thesis we need to consider the dozens of companies – both public and private – that are developing various metal 3D printing technologies – from Joule printing to powder bed fusion. Various methods are useful for various use cases, so there’s no “one winner takes all,” though there certainly can be multiple winners and losers. The metal 3D printing company that’s leading right now is probably Desktop Metal given their move to consolidate the space by acquiring ten companies in 2021, the most notable being EnvisionTEC and key competitor ExOne. We like Desktop Metal’s ambitions, but need to see more granularity on how they report revenues along with some success around selling their flagship product – the P-50 production platform – which is finally going to market. The biggest point of contention we have right now surrounds what Desktop Metal actually does, something that needs to be reflected in how revenues are reported.
The most desirable metal 3D printing company will have diversified revenues across various industries and will supplement their printer sales with high-margin consumables and services. These days, you need to supplement the sale of widgets with recurring revenues streams. We’ll be paying close attention to where revenues come from so we can identify businesses that will be sustainable beyond just selling metal 3D printers.
Three Pure-Play Metal 3D Printing Stocks
Setting private companies aside, metal 3D printing investors have a handful of pure-play stocks to choose from when it comes to companies that derive a majority of their revenues from manufacturing metal 3D printers.
| Market Cap | Revenues | Simple Valuation Ratio | |
| Velo3D (VLD) | 1744 | 42 | 42 |
| Desktop Metal (DM) | 1481 | 227 | 7 |
| Markforged (MKFG) | 769 | 107 | 7 |
Velo3D is clearly the outlier when it comes to valuation, something we discussed in our recent piece on value traps in special purpose acquisition companies ( SPACs). To put this in perspective, Velo3D shares would need to trade at $1.59 apiece for the company to have the same valuation ratio as Desktop Metal and Markforged. One reason Velo3D could be overpriced is the SpaceX affiliation which isn’t necessarily a positive.
Velo3D
The last time we wrote about Velo3D was exactly one year ago and since then they’ve managed to file a 10-K annual report we can mine for insights. The biggest news for 2021 was the release of their first-generation production machine – the Sapphire printer system – that was released towards the end of last year. Going into 2022, 46 machines had been shipped and are currently in the field. The company sells direct to manufacturing customers – 18 of them at the end of 2021 (up from 10 the year before). Sales to their top-three customers accounted for 62% of 2021 revenues (72% in 2020). The biggest of these is SpaceX which accounted for nearly 28% of 2021 revenues (down from 41% in 2020), though the company expects that “SpaceX revenues as a percentage of our total revenues will increase in 2022 compared to 2021.” Here’s how many printers SpaceX has ordered so far vs what Velo3D has delivered:
- 2018: Ordered 1 / Delivered 1
- 2019: Ordered 11 / Delivered 7
- 2020: Ordered 10 / Delivered 4
- 2021: Ordered 4 / Delivered 4
When your largest customer asks you to jump, your response should be “how high?” Bulls see SpaceX using Velo3D printers as a vote of confidence, but it also presents some very heavy customer concentration risk. The other concern we have surrounds how Velo3D plans to generate revenue beyond just selling $1.7 million printers of which only so many can be sold. Below you can see the company’s revenue segmentation for 2021:
Intuitively, we would look for “Support services” to slowly increase over time as an overall proportion of revenues, but right now the cost of support services actually exceeds the revenue taken in, so that’s hardly a high-margin segment. The “Recurring payment” revenue stream refers to the leasing option they provide for printers, and there’s no mention of consumables. Contrast this to Markforged which has more of what we’re looking for in a business model.
Markforged
The last time we looked at Markforged was about a year ago in a piece titled Markforged Stock – A Play on 3D Printing and AI. At that time, we noted 30% recurring revenues coming from an install base across 10,000 facilities with an incredibly diverse client base. The company claims to have “the only industrial 3D printing family for fabricating Composite, Continuous Fiber and Metal parts on the same platform.” No single customer accounts for more than 10% of total revenues, and around 30% of 2021 revenues were recurring, which included consumables, services, and premium software subscriptions.
We’re not provided with a breakdown of costs for each segment, but at an aggregate level, Markforged had a gross margin (revenues minus cost of goods sold) of 58%. Contrast that with Velo3D’s gross margin of 18%. The significant difference in profitability likely stems from Markforged having a growing percentage of revenues coming from consumables, software, and service contracts (generally ranging from one to three years).
Aside from the fact that we don’t invest in companies with a market cap of less than $1 billion, Markforged seems like an attractive way to get exposure to the metal 3D printing thesis with an easy-to-understand revenue reporting segmentation. Contrast this to Desktop Metal which now needs to provide some color around the ten acquisitions made in 2021.
Desktop Metal
Several weeks ago we published a piece titled Desktop Metal Stock: New and Improved – On Sale 50% Off so we’ll keep this short. When a company makes ten acquisitions in a single year as Desktop Metal has done, the dust needs to settle before we can understand what the final service/product offering looks like. This includes aggregating all the financials into a single picture so we can see where the majority of revenues are coming from. Until that happens, we can’t tell exactly what exposure we’re getting to healthcare applications vs. consumables vs. the long-awaited P-50 production platform which is finally being rolled out this year. We’re in no hurry to invest in this stock because we’ve already placed our bets on a related thesis – distributed manufacturing.
Investing in Metal 3D Printing Stocks
In our own tech stock portfolio, we’ve taken a different approach to investing in metal 3D printing stocks by looking at the distributed manufacturing thesis which stands to disrupt the fragmented machining industry that’s ripe for some disruption. In this way, we’re always benefiting from the best metal 3D printing technology, regardless of which company currently produces it. Our thesis comes with its own business model idiosyncrasies (software vs. hardware, for example), but that’s a conversation for another time.
If you’re trying to decide which of these three stocks to invest in, you could just opt for an equal weighting of all three, or just MKFG and DM if you don’t feel like overpaying for VLD. Today’s analysis shows how important revenue segmentation becomes when analyzing a company’s business model, and from that perspective, Markforged is the most attractive of the lot, albeit the smallest. As for all three companies choosing the SPAC route, we were surprised to see that revenue estimates were not only met but exceeded.
| 2021E | 2021A | Difference | |
| Velo3D | 26 | 27 | 5.5% |
| Desktop Metal | 77.5 | 112 | 45.0% |
| Markforged | 87.6 | 91 | 4.1% |
That looks great. Now, let’s focus on the 2022 revenue estimates offered up in those glossy SPAC decks which can be seen below:
- Markforged: $122.5 million
- Velo3D: $89 million
- Desktop Metal: $165.8
Management teams need to be held accountable for expectations they set, and so far, all three firms are besting their estimates which is promising.
Conclusion
These three small companies exceeded investor expectations in 2021 and – except for Velo3D – managed to reach more reasonable valuations. Today, Markforged appears to have the most attractive business model, but is under our market cap cutoff of $1 billion. Desktop Metal’s grand consolidation plans happened in 2021, and now we’re waiting to see what the aggregated offering looks like with revenues segmented. Velo3D has too much customer concentration risk, and we’re left wondering if recurring revenues for their $1.7 million machines can become a profitable chunk of their business in the future.
