Jeff, can you provide an update on your views of the 3D printing market? There has been so much turmoil over the past year with merger/acquisition fights that it's hard to tell if companies like Desktop Metals (DM) are still solid long term investments. Any insight would be greatly appreciated. It's great to see you're back. — Greg W.
Hi Greg, this is such an exciting industry.
And you’re very right, there has been so much turmoil over the last couple of years.
This has created a lot of confusion in the market regarding additive manufacturing (3D printing) companies. It has been an unfortunate distraction from an otherwise incredible growth story for the industry.
At a high level, the two headwinds have been the turmoil that you mentioned, and the fact that all of the additive manufacturing companies are small capitalization growth stocks.
As we’ve been exploring in past issues of Outer Limits, these small cap growth stocks have suffered in this high interest rate environment.
Institutional capital fled out of some of the most exciting small growth companies for the safety of money market funds or treasures that are paying attractive yields in a very uncertain economic environment. This has resulted in valuations for small cap companies that simply make no sense at all.
And its these low valuations that has been the catalyst for the turmoil that you mentioned. This is because undervalued companies make for attractive acquisition targets.
A perfect example of that is the attempt by industry incumbent Stratasys (SSYS) to acquire Desktop Metal (DM).
Last May, Stratasys made a move to acquire Desktop Metal for $1.8 billion.
Desktop Metal has been one of the most desirable companies in the industry over the last few years. It wasn’t a surprise to see the acquisition offer.
And while the figure sounded like a lot, $1.8 billion was only 8.6-times Desktop Metal’s 2022 sales.
In a healthy market, acquisitions often happen at larger premiums than that.
It was an all-share offer, so Stratasys could have absorbed Desktop Metal and come out stronger as a result.
But last September, Stratasys shareholders voted against the acquisition due to the high price. Stratasys ended up paying Desktop Metal a $32.5 million breakup fee.
And while all of this was happening… another favorite of mine — Nano Dimension (NNDM) — was attempting to acquire Stratasys outright.
This is a very interesting deal for a few reasons.
Between January 2020 and April of 2021, the Nano Dimension executive team went out and raised $1.5 billion in capital, taking advantage of the low interest rates at the time.
Those raises were dilutive to existing shareholders, but they put Nano Dimension in an incredible financial position.
This was clearly strategic.
It was obvious that Nano Dimension was raising capital for strategic acquisitions. And by July 2022, Nano Dimension had already acquired 14.5% of all of Stratasys’ stock in the open market.
Then, in March of 2023, Nano Dimension offered to acquire Stratasys for $1.1 billion in cash, not stock.
What’s interesting is that Stratasys is a far larger company. It generated $162 million in revenue in the third quarter of 2023 compared to Nano Dimension, which came in at just $12.2 million.
That’s more than 13-times the quarterly revenue of Nano Dimension… yet Nano Dimension was offering $1.1 billion in cash. Very unusual.
But it was able to do so because of its strategic fund raises.
The negotiations between the two companies have continued. And a few weeks ago, Nano Dimension updated its all-cash offer for Stratasys to $16.50 a share, and potentially higher after due diligence has been completed.
While it is not clear yet if the deal will go through, it is clear that incumbents like Stratasys and 3D Systems (DDD) have been struggling for years.
I don’t like either company. They both adopted a very similar strategy of a long line of smaller acquisitions mushed together. It made for messy mergers and integrations, and ultimately didn’t increase their share prices.
Smaller, more up and coming and innovative companies like Desktop Metal, Nano Dimension, and Markforged (MKFG) are far more interesting.
More specific to your question, Desktop Metal is currently trading at an enterprise valuation of $228 million, which is about on par with their annual sales. At that valuation, the enterprise value to sales ratio is just 1.14. Dirt cheap.
And we already know that Stratasys valued Desktop Metal at $1.8 billion just a few months ago.
At these prices, Desktop Metal is an incredible bargain. But that doesn’t mean that we’re done with the volatility in small cap growth stocks.
We’re likely in for a tough year, and Desktop Metal may have to raise additional capital before the end of the year, which would dilute existing shareholders, most likely in the 10-15% range.
If we step back, though, and take a bigger picture view, these companies have incredible potential.
The size of the additive manufacturing market will exceed $100 billion by 2030.
That means the annual growth rates will exceed 20% for years to come.
And when I consider the impact of artificial intelligence (AI) on something like additive manufacturing, I can’t help but become even more excited.
AI has the ability to design objects and components optimized for weight and structural integrity…
AI has the ability to develop completely unconventional looking components that would be unthinkable for a human designer…
But there is one problem…
Traditional manufacturing methods are not able to produce those AI-designed components. They are too complex.
Here’s a perfect example of structural component developed by NASA using AI.
It kind of looks alien, doesn’t it?
Yet it is highly functional, structurally sound, and ultimately reduces the weight by about a third of the original component.
This is where additive manufacturing (3D printing) comes into play.
Companies like Desktop Metal can manufacture parts like the above, despite the complexity.
We’ve only scratched the surface of what’s possible combining AI and additive manufacturing.
We’re in for some very exciting developments in this space over the next few years.
