Additive Manufacturing industrialization driven by medical and aviation

Development of publicly traded companies

The investor’s view 2021

Publicly traded Additive Manufacturing (AM) companies experienced dramatic swings in demand and valuation over the last twelve months. The onset of the pandemic resulted in a severe decline in equipment sales for many companies, along with a steep drop in equipment usage, and thus consumable material sales. Many companies reported that equipment sales and usage run-rates were about cut in half in March and April 2020. Some companies reported as much as a 95% drop in usage at the low point. Both STRATASYS and 3D SYSTEMS experienced a near 30% decline in sales in second quarter 2020. Although not all publicly traded companies reported final 2020 results at the time of publication, it seems clear that publicly traded companies collectively experienced a collective 10%-15% revenue decline for the full year.

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Valuations for the publicly traded companies went on a wild ride over the last twelve months. For example, shares of 3D SYSTEMS began 2020 at $9, dropped to a low of $5 midyear, reached $57 in February 2021, and recently were trading in the mid-$20 range. Shares of STRATASYS and other AM companies followed a similar pattern. The reason for the initial decline in stock prices was of course obvious—the global pandemic. The major reasons for the initial recovery in the prices of AM stocks were likely the same reasons stocks in general began to recover. We believe the key reasons included expectations for economic recovery, optimism regarding a vaccine, accommodative monetary policy, and fiscal stimulus. Further expansion in the valuations of AM companies was, in our view, driven by expectations that AM would play an expanded role in the post-pandemic economy—offering companies and governments supply chain security and manufacturing flexibility in the case of a future similar event. More recently, valuation multiples have contracted materially from the highs in early 2021.

Although DESKTOP METAL joined the ranks of public companies at the end of 2020, 3D SYSTEMS and STRATASYS continued to account for the majority of the market capitalization of AM companies throughout most of the year. 3D SYSTEMS’ revenue declined 12% in 2020. STRATASYS reported an 18% decline. 3D SYSTEMS benefited from proportionally greater healthcare exposure, and specifically demand associated with the manufacture of dental aligners.

The midpoint of STRATASYS management’s revenue guidance range at the outset of 2020 indicated the company expected revenue growth of about 2% for the full year. 3D SYSTEMS management did not provide a revenue forecast at the beginning of 2020. The pandemic, of course, weighed on both companies’ financial results during the year, particularly in the first half. STRATASYS reported a first-quarter revenue decline of 14% year-over-year, which included a 40% year-over-year drop in printer revenue. In second quarter 2020, STRATASYS revenue was down 28%, including a 36% decline in printer revenue. In first quarter 2020, 3D SYSTEMS reported an 11% year-over-year revenue decline, including a 35% drop in printer sales. In second quarter 2020, 3D SYSTEMS’ revenue was down 29%, including a 38% decline in revenue associated with printers and other products. Materials sales at 3D SYSTEMS were down about 30% in the second quarter. Most private AM companies suffered similar near-term declines, particularly at the onset of the pandemic, driven by customer shutdowns and broad declines in capital spending across most industries.

3D SYSTEMS’ 12% organic revenue decline in 2020 follows a series of largely disappointing revenue results in recent years. On an organic basis, revenue was down 7% in 2019, up 5% in 2018 (supported by the dental aligner industry), and relatively flat in 2017. Organic revenue declined 5% in both 2016 and 2015. The company’s revenue growth rate has decelerated substantially since reporting organic growth of 25% in 2012, 30% in 2013, and 14% in 2014. STRATASYS has experienced a similar slowdown, with the organic revenue decline of 18% in 2020 following declines of 2% in 2019, 1% in both 2018 and 2017, 3% in 2016, and 10% in 2015. The company experienced organic revenue growth of 27% in 2012, 25% in 2013, and 32% in 2014.

Slower growth in recent years likely contributed to management changes at both companies. 3D SYSTEMS’ long-time CEO Avi Reichental left the company in October 2015 and was replaced in April 2016 by HP veteran Vyomesh “VJ” Joshi. In February 2020, 3D SYSTEMS announced that Joshi planned to retire. Dr. Jeff Graves took over the role of president and CEO of 3D Systems in May 2020. STRATASYS’ former CEO David Reis retired in June 2016 and was succeeded by board member Ilan Levin. Levin stepped down in June 2018 and Chairman of the Board Elan Jaglom subsequently assumed the role of interim CEO while the company searched for a permanent CEO. Yoav Zeif officially assumed the CEO role at STRATASYS in February 2020.

The growth characteristics, market opportunities, and disruptive potential of AM companies, coupled with ongoing media coverage, continue to attract the attention of investors. STRATASYS, 3D SYSTEMS, and DESKTOP METAL (which went public in December 2020) are the largest publicly traded AM companies in the United States. Stratasys trades on the NASDAQ exchange under the ticker symbol SSYS. 3D SYSTEMS and DESKTOP METAL trade on the New York Stock Exchange (NYSE) under the ticker symbols DDD and DM, respectively. Other publicly traded AM companies on the NASDAQ include EXONE (XONE), MATERIALISE (MTLS), NANO DIMENSION (NNDM), and VOXELJET (VJET). SLM SOLUTIONS (AM3D) trades on the Xetra platform in Frankfurt, Germany.

Although NANO DIMENSION generated revenue of only $3.5 million in 2020 (down 52% from 2019), the company now has a market capitalization of almost $2 billion following 11 stock offerings within a twelve month period that collectively added over $1.5 billion cash to the company’s balance sheet. Since inception, NANO DIMENSION has sold about 60 printers used primarily for the fabrication of circuit boards.

PROTO LABS (PRLB) is a provider of low-volume custom parts, made primarily with injection molding and CNC machining. The company acquired FINELINE PROTOTYPING in April 2014 and portions of ALPHAFORM AG in October 2015. Both companies were AM service providers. AM services accounted for 14% of total revenue at PROTO LABS in 2020. In January 2021, PROTO LABS acquired online manufacturing platform 3D HUBS for $280 million with a combination of cash and stock (with the potential for an additional $50 million in consideration if 3D HUBS meets performance targets). AM services accounted for about one third of 3D HUBS revenue at the time of the acquisition. PROTO LABS trades on the NYSE.

As shown in the table below, AM stock price performance was mixed compared with the broader market indices in 2020. For the year, the Dow Jones Industrial Average increased 7% and the S&P 500 increased 16%. These changes in the major indices provide reference points when comparing the changes in AM company stock prices. The potential for pandemic-stimulated demand, DESKTOP METAL’s public debut, and other factors have contributed to significant increases in the share prices for several AM companies in early 2021. As of the close on March 10, 2021, the Dow was up 6% and the S&P 500 was up 4% year-to-date in 2021.

In recent years, several private competitors have garnered significant interest from the investment community, and some of these companies have captured substantial market share in recent years. One of these companies, DESKTOP METAL, is now public after being acquired by a special purpose acquisition company (SPAC). Another, MARKFORGED, has also signed an agreement with a SPAC, which should lead to MARKFORGED becoming a publicly traded company in the summer of 2021. Other private companies that have raised significant funding in private investment rounds include CARBON, FORMLABS, VELO3D, and XJET. ULTIMAKER has also quietly grown its revenue base under private equity ownership, likely achieving an annual revenue run-rate of more than 60 million euros in each of the last two years.

Given that companies interested in going public are increasingly utilizing the SPAC process, we believe it may be useful to provide a brief overview of the process, along with a comparison to the traditional path companies have used to become publicly traded. A special purpose acquisition company, or SPAC, is a shell corporation that raises funds from investors in an initial public offering (IPO)—usually a few hundred million to a few billion dollars—and then sets out to identify a privately held company to merge with. SPAC IPOs are usually priced at $10 per share. When a SPAC finds a company to merge with a formal merger agreement is announced. When the merger closes, typically three to four months after the deal is announced, the SPAC’s name is generally replaced by the target company’s name, and the SPAC stock ticker changes to ticker more representative of the new company. In 2020, there were 248 SPAC IPOs in the United States, up from 59 in 2019. The trend only accelerated in 2021. As of mid-March 2021, the total number of SPAC IPOs in 2021 had already exceeded the 248 completed in all of 2020. There are several primary reasons that more companies are choosing the SPAC method of becoming public recently. First, the process is faster. Because the shell company has already established itself as a public company, many steps associated with the traditional IPO process have already been completed. Also, the SPAC process typically includes an intermediate investment round, called a PIPE, or private investment in public equity. This investment round rases funds from institutional investors, injecting the company with capital and helping to establish a valuation for the company. With new capital from SPAC and from the PIPE investment, the target company becomes better funded to invest in growth or even acquiring other companies. In short, the SPAC process is a relatively fast way for a company in its early stages of growth to become public, gain growth capital, and raise its profile.

DESKTOP METAL was acquired by a SPAC called Trine Acquisition Corp in December 2020 in a deal that valued the company at $2.5 billion and delivered about $580 million in gross proceeds to DESKTOP METAL. The company’s stock was trading with a market capitalization of $3.6 billion as of March 8, 2021. Through September 2020, Desktop Metal reported $8.1 million in revenue and an operating loss of $70 million. In February 2021, DESKTOP METAL acquired privately-owned ENVISIONTEC for a purchase price of $300 million. ENVISIONTEC reported $35 million in revenue and an operating loss of $1 million in 2019. Revenue at ENVISIONTEC totaled $33 million year-to-date through September 2020.

On February 24, 2021, MARKFORGED announced the company would go public using the same type of process DESKTOP METAL did, merging with a special purpose acquisition company called ONE. The transaction is expected to be completed in summer 2021 and result in an equity value for MARKFORGED of approximately $2.1 billion. MARKFORGED reported revenue of about $70 million in 2020 with approximately 55% gross margin. The company now has a printer installed base of about 10,000 units. MARKFORGED offers a wide range of printers capable of fabricating metal, polymer, and composite parts. The company’s growth has been supported by demand for printers capable of building continuous carbon fiber into parts. The strength of the parts formed by the MARKFORGED printers has resulted in customers often using the company’s printers to replace aluminum and steel parts with printed carbon fiber parts.

CARBON has raised about $680 million in funding and has reportedly received a valuation of about $2.4 billion in the latest funding round. The company now has over 400 employees. Despite headwinds from the pandemic, CARBON reported more than 30% growth in print hours across its machine installed base in 2020. Printer usage dropped dramatically during the early days of the pandemic, almost to zero at one point. Usage quickly recovered, however, returning to pre-pandemic levels by June 2020. Revenue has increased at a compound annual rate of greater than 40% for the 2016-2020 period. CARBON worked with its manufacturing partners to produce swabs and face shields during the pandemic. By mid-June 2020, the effort had produced over 350,000 face shields.

FORMLABS has raised over $100 million and was valued at over $1 billion in the latest funding round. The company reported a record revenue result of greater than $100 million in 2020. In addition, the fourth quarter 2020 revenue result was the highest level of quarterly revenue in the company’s history. Gross margin for the year was about 50%. In 2020, FORMLABS sold more than 13,000 printers, bringing the installed base to about 75,000. At the peak of the pandemic last spring, FORMLABS was producing 100,000 swabs a day at its Ohio printing facility. To date, FORMLABS printers have produced tens of millions of swabs that are being used in more than 25 countries.

VELO3D has raised $138 million in funding through the most recent Series D round in April 2020. The company reported revenue of $19 million in 2020 and entered 2021 with substantial backlog and plans to achieve revenue greater than $25 million in 2021 and approximately $90 million in 2022.

Financial results

The following tables showcase reported revenue and earnings per share (EPS) figures for publicly traded AM companies in 2019 and 2020 as well as consensus estimates for 2021. We also provide additional details regarding 3D SYSTEMS’ and STRATASYS’ 2020 financial performance below.

3D SYSTEMS generated revenue of $557 million in 2020, down 12% from $633 million in 2019. Results include a 20% decline in printer revenue, a 7% decline in materials revenue, and a 9% decline in services revenue. In 2020, management divested businesses that collectively generated $44 million in revenue in 2020, so excluding these businesses, 2020 revenue would have been $513 million (and this is the figure that should be used for calculating organic growth (or decline) in 2021).

Adjusted gross margin contracted 270 basis points to 42.6% in 2020. Product gross margin contracted 810 basis points and services gross margin increase 130 basis points. The company was about breakeven in terms of adjusted operating income in each of the last two years, generating $300,000 in adjusted operating profit in 2020, down from $1.2 million in 2019. 3D SYSTEMS reported adjusted EPS of -$0.11 in 2020, down from -$0.08 in 2019.
3D SYSTEMS’ management did not provide official guidance for 2021.

STRATASYS generated revenue of $521 million in 2020, down 18% from $636 million in 2019. Product revenue (systems and consumables) declined 21% year-over-year. Revenue from the product segment represented 65% of fiscal 2020 sales. Service revenue at STRATASYS declined 12% year-over-year. Adjusted gross margin contracted 470 basis points to 47.6% in 2020. Product gross margin contracted 540 basis points and services gross margin contracted by 130 basis points. Adjusted operating margin contracted 720 basis points to -1.8%. Operating expenses declined by 14% in 2020, in large part because the company moved many employees to a four-day work week for much of the year to cut costs during the pandemic. Despite cost measures, operating expense as a percentage of sales increased 240 basis points, to 49.4%. STRATASYS reported adjusted earnings per share (EPS) of -$0.25, down $0.81 from $0.56 in 2019. Looking ahead, the 2021 consensus forecast for STRATASYS includes 7% revenue growth, to $560 million, and adjusted EPS of -$0.03. Management did not provide formal guidance for 2021. STRATASYS acquired AM start-up ORIGIN in January 2021 for a purchase price of $100 million. The company also bought a small, UK-based SL printer manufacturer called RP SUPPORT in February 2021.

Two of the most common valuation metrics used by investors are the price/earnings (P/E) and enterprise value/EBITDA (EV/EBITDA) multiples. The following tables highlight P/E and EV/EBITDA valuations as of March 10, 2021. Among profitable companies based on 2021 estimates, investors currently place the highest premium on shares of 3D SYSTEMS on a P/E basis and MATERIALISE on an EV/EBITDA basis. Based on 2022 estimates, investors currently place the highest premium on MATERIALISE on a P/E basis and DESKTOP METAL on an EV/EBITDA basis.

Several AM stocks have significant short interest. As of March 10, 2021, 9% of 3D SYSTEMS’ outstanding shares were sold short, meaning that many investors are betting the stock price will decline. This compares to 7% short interest each for STRATASYS, PROTO LABS, and EXONE, and 1% for MATERIALISE. Short interest for these companies was lower compared to previous years likely due to significant increases in the share prices of several companies in early 2021.

Many companies took advantage of appreciation in share prices by executing stock offerings. As mentioned above, NANO DIMENSION raised about $1.5 billion across 11 different stock offerings. SLM SOLUTIONS raised 15 million euros in an offering of convertible bonds in July 2020. VOXELJET raised $22 million between two offerings in January and February 2021. EXONE raised approximately $90 million in a February 2021 offering. STRATASYS raised about $200 million in a stock offering in March 2021.

Outlook

The potential for pandemic-stimulated demand, DESKTOP METAL’s public debut, and other factors have contributed to significant increases in the share prices for AM companies in early 2021. Through March 10, 2021, shares of 3D SYSTEMS, STRATASYS, EXONE, and VOXELJET were up 153%, 23%, 243%, and 57%, respectively. However, relative to all-time historical high share prices, 3D SYSTEMS, STRATASYS, EXONE, and VOXELJET were still down 73%, 81%, 57%, and 78%, respectively. Current valuations of AM companies imply that investors generally anticipate growth across the industry, with expected increases in demand for 3D printing systems, consumables, and part-building services.

Given overall growth in the AM industry has outpaced growth reported by public companies, it seems clear that industry growth has been driven by private competitors in recent years. Now, with the public trading debut of DESKTOP METAL and the expected public trading debut of MARKFORGED in 2021, it will be interesting to monitor some of these newly public competitors. Over the next two to three years, it is also likely more growing private companies will file for initial public offerings.