The recent battle for Stratasys Inc (SSYS) shows there is renewed interest in the 3D printing sector, and few public companies to choose from as an investor. Stratasys, which had a bid in place from Desktop Metal (DM) received a third party bid from 3D Systems (DDD), which the company recently rejected in favor of the DM bid.
But the bidding war shines a spotlight on a sector that does not have a large number of public companies competing for 3D printing business. Desktop Metal is the result of a SPAC (Special Purpose Acquisition Company) deal that brought the company public in late 2020, right into a 3D printing bubble in early 2021.
That bubble has long since popped, and valuations have come back to levels where, as mentioned above, the companies are vying to consolidate. Our top rated stock in the sector, via our POWR Ratings, is Proto Labs (PRLB).
Proto Labs brings together 3D printing and CNC machining. CNC, or computer numerical control, is the process of using software to tell a machine exactly where and how to cut a material to produce a very exact product to very exact specifications. The process is often used to make unique parts which are very often parts of prototype products.
Or, it can be used to produce a unique product required by a unique individual…leading to a large market in the medical and health care area. So, you can think of 3D printing companies as broadly making two things, parts (or whole) prototype products, and “unique” products suited to an individual (human or otherwise) need.
Given this, Proto Labs operates in 5 areas: medical and health care, as noted above, computers and electronics (those are its two largest markets), aerospace, industrial equipment, and automotive. The company has been growing revenue on a fairly steady trajectory, and has a 10 year CAGR (compound annual growth rate) of 14.5%.
The company has 12 digital factories around the world, which allows customers to upload digital designs and have parts delivered quickly via a local network. The current state of the 3D printing market, as I alluded to above, is very fragmented and Proto Labs is one of very few scale players in the market.
Proto Labs has gross margins of over 44%, and currently has $107 million of cash and cash equivalents combined with no debt. This is a huge competitive advantage in the current rising rate environment, giving Proto Labs a leg up on smaller companies that need to continually raise capital.
As I noted, PRLB is our top 3D printing POWR Ratings company, with an overall 89.92% score, and particularly good scores on the Value and Quality components.
Our third ranked 3D printer (only behind the aforementioned Stratasys, which is set to be acquired) is Materialise (MTLS).
Materialise is fascinating not because of its 3D printing capability, but because of its proprietary software that lets customers manage “AM”, or additive manufacturing, throughout the entire lifecycle of product creation and production.
Materialise software allows customers to design (the customer design team can be geographically dispersed), test, and iterate on a product before ordering the product (through a built in order management system) which can then be printed either by MTLS or one of its partners.
Many of the devices manufactured through 3D printing have to meet exacting regulatory standards (in many cases medical standards), and the software also must be able to protect proprietary product data, which is being provided in the production process.
The MTLS software is robust enough to meet all of these interests, and is scalable as a software product tied to production. The company actually has one of the largest 3D printing factories in the world.
Materialise sports gross margins of over 50%, and should show improving operational margins as its newly designed software gains traction. In its latest quarter the company reported an 11.6% YoY revenue increase, driven both by rising prices and volume.
Materialise rates an overall B in our POWR Ratings. Its highest component ratings are in Value, where it rates an extremely high 97.53%, and Sentiment.
The 3D printing market is growing and evolving after a bubble in the sector a few years ago. Valuations have come back to earth, and Proto Labs and Materialise are two of the few companies that have achieved scale, and should be major players going forward.
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PRLB shares were trading at $25.16 per share on Thursday morning, down $0.13 (-0.51%). Year-to-date, PRLB has declined -1.45%, versus a 13.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.
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