VLD - Velo3D: Holding Its Own

2023-04-19 13:17:06 ET

Summary

• Today, we revisit 3D printing concern Velo3D and check in on the substantial progress the company has made since our initial article in May on Velo3D.
• While still not profitable, the company is seeing impressive sales growth and is projecting much improved gross margins going forward.
• An updated analysis around Velo3D follows in the paragraphs below.

"Success is stumbling from failure to failure with no loss of enthusiasm ." - Winston S. Churchill

Today, we put Velo3D, Inc. ( VLD ) in the spotlight for the first time since our initial article on this small 3D printing-related concern back in May of last year. We concluded that piece with this recommendation:

Velo3D is likely to continue to post decreasing losses in coming years as sales ramp up impressively. While not cheap at approximately three times FY2023 projected sales, I think there is enough to this story to merit a small 'watch item' holding for aggressive long-term investors. There are options available against this equity. The premiums in them are solid and have decent liquidity. Therefore, I will probably use a simple covered call strategy Tuesday when the market reopens to establish a small position in VLD ."

That seems to have been the right call, as Velo3D, Inc. shares trade just a tad lower than they did during our first piece. Today, we will update the investment thesis around this small-cap name. An analysis follows below.

Company Overview:

This San Jose, CA manufacturer designs and produces metal additive three-dimensional printers that enable the production of components for space rockets, jet engines, fuel delivery systems, and other high-value metal parts. Velo3D both sells and leases its Sapphire® family of metal 3D printers to customers. These fully integrated metal additive manufacturing devices enable engineers to build the complex and mission-critical parts. These systems can reduce manufacturing steps by 65%. In addition, they can enable lower overall part and manufacturing costs and produce a higher quality part than traditional methods. Finally, Sapphire systems can dramatically improve the supply chain cycle time with a design for real-time of 4 to 6 weeks against 12 to 18 months with an outsourced partner.

The Space industry accounts for roughly a quarter of overall sales while Velo3D has a presence in the energy, aviation and defense, contract manufacturing sectors as well. The stock trades just under $2.25 a share with an approximate market capitalization of $430 million.

Fourth Quarter Results:

On March 2nd, Velo3D, Inc. posted its fourth quarter numbers . The company incurred a non-GAAP loss of 8 cents a share, four pennies better than expectations. Revenues rose more than 186% on a year-over-year basis to just under $29.8 million, some $1.7 million above the consensus. Gross margin was 5.9% for the quarter, and operating expenses declined 15% to $23.7 million from the same period a year ago. Recurring service revenue grew to $2.8 million, against just $1 million in the same period a year ago, as more Sapphire systems are now deployed in the field. Sales revenues rose from $9.4 million in 4Q2021 to $27 million, an improvement of 187%.

Management provided preliminary sales guidance for FY2023 at between $120 million and $130 million. Importantly, the company believes that gross margins will increase to between 9% to 11% in 1Q2023 and to 19% to 21% for all of FY2023. It projects gross margins of 30% in 4Q2023. Leadership credits improving gross margins to " Production cycle times for the Sapphire XC system continuing to improve due to increased volume and improved manufacturing efficiency." Order backlog stood at $43 million at the end of 4Q2022.

Analyst Commentary & Balance Sheet:

The company is sparsely followed on Wall Street despite a decent market capitalization. Since the fourth quarter results were posted, William Blair reissued its Buy rating on the stock while Credit Suisse maintained its Neutral rating and $3.70 a share price target.

Approximately 11% of the outstanding shares in this stock are currently held short. Insiders have sold just over $120,000 worth of shares in aggregate so far in 2023. The company ended FY2022 with approximately $80 million worth of cash and marketable securities on its balance sheet . Velo3D had just over $5 million in long-term debt as of the end of the 2022 fiscal year.

Verdict:

The current analyst firm consensus has Velo3D, Inc. losing approximately a quarter a share, even as revenues grow just over 50% to $124 million. They collectively see sales growth slow slightly in FY2024 to just under 50% while losses get cut to roughly a dime a share.

While the stock has fallen slightly since we last looked at Velo3D, the company has made some significant progress. The company customer count rose approximately 50% in FY2022 over FY2021, and revenues grew almost 200%. Velo3D has become the fastest-growing company in the metal additive manufacturing or AM industry since Q1 2021.

Quarterly cash burn remains somewhat worrisome, but management assured investors during its fourth quarter earnings conference call that it is " confident that we have the liquidity to fund our business plan through the profitability ." An investor will have to keep a close eye on whether Velo3D, Inc. can hit its gross margin guidance in the quarters ahead, but VLD does seem to be executing well and still merits a " watch item" holding until it gets closer to profitability.

"The best way out is always through ." - Robert Frost

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