XMTR - Xometry: AI-Powered Exponential Growth

2023-06-12 08:22:14 ET

Summary

• The 3D printing sector may have experienced a price bottom, but Xometry might be the one about to soar.
• Xometry's competitive advantage and partnership with Alibaba Group Holding could lead to exponential growth in the coming years.
• The company is expected to have positive EBITDA by Q4 2023 and has strong relationships with its customers and supporters on Wall St.

The 3D printing sector appears to have found a price bottom in recent weeks; Merger and acquisition activity has brought the industry back onto the financial front pages as it goes through an inevitable consolidation. The industry is maturing and has too many players; technology is becoming more of a commodity as it becomes well-understood and pervasive in many industries. There are going to be winners and losers.

3D Printing Sector Performance

Price performance suggests a bottoming price in the last month or two following a tough 12 months, with the sector down 23% on average.

Nano Dimension ( NNDM ) kicked off the M&A activity with its $1.1 billion bid for Stratasys ( SSYS ), and 3D Systems ( DDD ) joined this particular bidding war with a $1.3 billion offer. Stratasys managers have rejected both bids and announced a plan to merge with Desktop Metal ( DM ).

NNDM, SSYS, DDD, and DM are all caught up in this activity; investing in any of them would be hard without a clear picture of the way forward.

Xometry (XMTR) does not manufacture Printers or printing materials; it does not manufacture anything. It is an online marketplace that connects buyers and sellers; in 2022, I discounted Xometry because of its business model. However, after the recent earnings call, I bought into the company believing it is about to enter an exponential growth phase.

Through their website, individuals can order small 3D printed items (as I did to test the service, it worked perfectly, and I received my plastic window lock in 3 days), and companies can order large quantities of 3D printed parts and tools.

I think Xometry has developed a significant and sustainable competitive advantage with high barriers to entry that will either provide organic sales growth or make it a target for takeover in the industry shakeout.

The competitive landscape

During my research, I found 37 online 3D printing platforms competing directly with Xometry; they include many small start-ups and some specialist outfits. Some companies print everything themselves, but many more are a marketplace for linking suppliers and customers. I identified five significant competitors based on geographical footprint, products and services, and brand awareness.

The table below contains information from the relevant websites; it shows that Xometry offers all the available technologies and more materials than its competition. It means that Xometry can be a one-stop shop; the quoting engine ensures that customers get precisely what they want.

Two of the four competitors are the companies currently involved in the takeover battle. CraftCloud is probably the closest to Xometry regarding products.

Craftcloud is a marketplace that contains more than 100 3D printing companies. One of them is ALL3D, which also operates Craftcloud. They offer worldwide delivery and have a reputation for good customer service. I did get a quote from Craftcloud for the part I bought from Xometry; they were 10% more expensive and could not meet the delivery dates of Xometry. Amazingly Xometry could deliver my window latch the next day for $25 or in 5 days for $11. I opted for next-day delivery paying $25 for a part I could buy from my local RV shop for $3.80, but I was testing. The piece is perfect and arrived on time.

Quickparts, formerly the direct arm of DDD is now operating as an independent company.

Quoting Engines The Competitive Advantage.

The online quoting engine will be the critical success criteria for these companies. Working out the correct price for a 3D-printed item can be very complex—the more complicated the thing, the more difficult the quote. Customers, many of whom will not understand the printing process, need to know what to pay for their item and when it will arrive. The product must be of the correct tolerance and manufactured the right way. The quoting engine works all of this out; it replaces the quoting department in manufacturing firms that assess the buildability of the item and exactly how much time will be needed to make and finish it. Some items require complex finishing with specialist materials; many combine different parts. The quoting engine must accurately determine what is required and link it to a shop that delivers the finished item. The workshop must receive the correct information, and their timelines must coincide with the customers. The workshop must profit at the quoted price, so every part of the build process must have been accurately worked out.

If you look into 3D printing, you will read about many issues.

An example would be the overhang problem. Imagine a bridge; if you try 3D to print a bridge more than 10mm long, it will sag in the middle, so supports must be part of the design, printed along with the bridge, and then removed by hand. It is unlikely the customer puts the supports in the design (I didn't), but the quoting engine must do and price the extra material and finishing time correctly.

Xometry has built an AI-enabled machine-learning quoting engine. It provides a significant and sustainable competitive advantage.

Thirteen patents protect the quote engine algorithm; when I first looked at Xometry last year, I did not fully understand the value of the quoting engine. It is an example of AI value generation; it has been trained on the more than 1 million quotes Xometry has already made and the data from its worldwide manufacturing network. Xometry has engaged with its customers to develop its product and train its quoting engine.

Trustpilot is full of examples of customers who have used Xometry.

The quoting engine is transformational for this industry, and it is being incorporated into CAD software products so designers can get immediate quotes on products they are working on or order a model for next-day delivery.

Alibaba: Commercial Validation and exponential growth

In the last earnings call, we heard about the deal with Alibaba Group Holding ( BABA ); I believe this deal is the validation of the competitive edge Xometry has over the competition, and this deal alone will turbocharge Xometry's growth in the coming years.

Alibaba runs a B2B wholesale marketplace in China called 1688.com; it has more than 30 million annual users. Alibaba will be integrating the Xometry quoting engine into 1688.com, and it will be the exclusive 3D printing quote engine on that sight. Xometry already has a significant presence in China through its own website and a large manufacturing base covering a full range of products and processes in operation.

Alibaba B2B customers will get their quote directly through the 1688.com site and order products within 1688.com using their existing accounts and interface. It will be transformational. Xometry's products will be in front of 30 million businesses by the end of this quarter (Q&A earnings call).

The terms of the deal are excellent for Xometry.

It is not a revenue-sharing agreement; there will be zero margin suppression. Alibaba will make its money through transaction charges and the float; customers in China pay in advance for their products. Alibaba will hold onto those funds and not release them to the supplier until delivery is confirmed. That float can be invested or held with interest. It is the usual way to do business in Asia, if somewhat different from what we are used to.

This deal, its exclusive nature, the customer base, and the Alibaba name could bring about several years of exponential growth as long as it goes well for many years of profitable business.

Customers Like Xometry

Xometry reports the number of customers with a 12-month spend greater than $50,000. It has grown steadily over the last year, increasing quarter on quarter. By Q1 2023, the number was 1,109, an increase of 40% from Q1 2022. ( page 22 sec filing )

Xometry appears to be providing a valuable service to its customers, with around 95% of revenue coming from repeat customers in the last five quarters ( earnings presentation page 20 ). Customers seem to increase their spending yearly and have done for seven consecutive years. New accounts joining in 2016 now spend ten times as much as they did in 2016; a similar story is shown for new accounts each year after 2016 (page 21 earnings presentation). It would appear that once a business becomes a Xometry customer, it stays a Xometry customer and sends increased trade to Xometry every year. All of this adds to the potential of the Alibaba deal.

Q1 2023 results

Xometry delivered its highest revenue for a single quarter. They report figures for the US and international separately; with the international market showing significant growth, the 1688.com future sales should drive this metric.

The 77% growth in Europe was driven primarily by the new UK and Turkish sites.

Xometry reports revenue under two segments; Market Place is the online 3D printing and manufacturing service I have discussed in this article. They have a secondary market, Supplier Services; this is income derived from the manufacturers they work with. It represents advertising and specialist services and is linked to the thomas.net subsidiary. Xometry discussed this as a future growth area in the recent earnings call. I need to see more evidence of growth here before I add it to my forecasts; it is a high-margin area that may be positive in the future.

Financials

This is a very unusual breakdown of share ownership, less than one percent owned by the general public. It is the only company I track where this is the case, and it should lead to some share price stability. Institutions are typically longer-term investors and only invest after substantial due diligence. I consider it a very positive sign. These institutional investors undoubtedly like the lack of dilution with very little in the last 12 months.

Financials and the competition.

With net income per quarter of -$18.3 million and only $40 million of cash in hand, the balance sheet might be considered precarious; however, the forward guidance given in the earnings call makes a significant difference.

FY 2023, revenue of $480 million was confirmed (excluding Alibaba). Xometry expects to have positive EBITDA by Q4 2023 and 2023 FY EBITDA to be around $25 million. (earnings call Jim Rallo CFO). If Xometry can hit these targets, I suspect they will beat them, then the balance sheet is adequate and will look far better in 12 months.

Conclusion

The AI-enabled machine learning quoting engine will likely transform Xometry into the world's largest and most profitable 3D printing company. The tie-up with Alibaba will be a transformational funnel for new business and continue the incredible growth of the international division.

They have a sustainable competitive advantage, large entry barriers for potential competitors, and an established worldwide footprint that is very difficult to compete with.

Wallstreet likes Xometry. They own the majority of it and are forecasting significant growth. I agree with them and give Xometry a strong buy rating.

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