It’s bad enough that the market seems to be completely ignoring The Rona which is decimating the trillion-dollar travel industry and – one could argue – has caused the price of agricultural products to skyrocket. But another lingering effect of the pandemic is that it gives everyone a pretty good excuse. Just listen to the outrage mafia on Twitter talking about how much more “exhausted” they are than usual. Everyone can play that game, and so can companies.
If you’re a company that was expecting a bad 2020 even before The Rona showed up, you’re loving life. For every stock we hold, it’s easy to give them a pass if revenue growth slowed during 2020. For many, it did, and for some, it exposed how fragile their business models are. We don’t mind seeing revenues dip during a crisis, but we’d like to see the basic financials recover like this company has:
In the above chart, revenue growth has resumed while costs are being reigned in because uncertain times are upon us.
But what if 2019 was a year when revenue growth slowed? Should a company then be given a pass on two years of declining growth – 2019 and 2020? That’s one question we’re trying to answer today. The below chart happens to be a company we’re long and recently added to a bit – Protolabs (PRLB).
As you can see, Protolabs’ 2019 revenues only grew by +2.9% while 2020 revenues fell by -5.3%. Drilling into the quarterly numbers shows that growth has yet to resume.
Since we’re always raving about the importance of revenue growth, we need to take a step back here and remind ourselves of why we invested in Protolabs stock to begin with.
The Distributed Manufacturing Opportunity
Market researchers talk about this big blue-ocean total addressable market (TAM) for distributed manufacturing, manufacturing on demand, smart manufacturing, manufacturing-as-a-service, or whatever term du jour that’s used to describe a revolution in manufacturing that’s moving towards rapid production and customization. For example, 3D printing has enabled space companies to build better rockets quicker, but it’s not just about 3DP. Is Protolabs a 3D Printing Stock?, we asked a few years back. Today, the answer is still no. Here’s the breakdown of 2020 revenues for Protolabs by production method:
- Injection Molding – 50.2%
- CNC Machining – 30.3%
- 3D Printing – 14.4%
- Sheet Metal – 4.3%
Protolabs is a pure-play on the distributed manufacturing thesis and clearly leading the pack. Their niche is “high mix, low volume,” and the below slide sums up why they stand to transform the fragmented environment in which they operate.
Protolabs recently purchased competitor 3D Hubs which is expected to add about $25 million a year in revenues. In order to get an idea of how Protolabs leads the pack, let’s compare them to the recent announcement by Shapeways that they’re going public using the dreaded special purpose acquisition company (SPAC).
Shapeways Stock to Go Public
Founded in 2007 as a spinoff of Philips electronics, Dutch company Shapeways first came across our radar back in 2016 when we talked about their “3D printing marketplace and community which allows users to upload their designs and have them printed.” Several years later, they made our list of 10 of the Most-Funded 3D Printing Startups in 2018. Today, they’re a company that resembles what 3D printing used to look like before everyone realized it was just another tool for producing parts. That’s perhaps the biggest difference between these two companies – Shapeways only offers 3D printing. In 2020, the company brought in $31.8 million in revenues which was less than the $33.5 million they brought in during 2019. In their glossy SPAC deck which contains hardly anything of substance, Shapeways talks about eventually offering other production capabilities such as CNC machining.
The idea of a 3D printing bureau that produces parts on demand never really transpired. Instead, we moved to “on-demand manufacturing” which is a business model that focuses on digitizing the manufacturing process and using whatever machine that makes sense – not just 3D printing. If someone asks you for a manufacturing quote and you turn it away because you only offer 3D printing, you’re missing out on a whole lot of business. Protolabs already has the business model that Shapeways wants to have, so we’re going with the lower risk option and choosing Protolabs over Shapeways. Size over beauty. Even if we weren’t already invested in Protolabs, we wouldn’t be considering Shapeways, especially given their decision to SPAC it.
If there’s a competitor that’s a threat to Protolabs, it’s probably one with lots more resources.
BASF Goes 3DP
Back in 2016, someone from Sculpteo told us their biggest competitors were Shapeways and I-Materialize. In 2019, Sculpteo was acquired by Germany’s BASF, the largest chemical producer in the world, with the stated purpose of “establishing additive manufacturing as a proven technology for industrial mass production.” Sounds an awful lot like all these companies are trying to do, and now one of them has the resources of BASF at their disposal now. Since 3Dprinting likely makes up a miniscule fraction of BASF’s $71.5 billion in 2020 revenues, we’re simply concerned with how BASF might present a competitive threat to Protolabs. That’s a bit tough to discern when you consider how many different things BASF is dabbling in.
There are plenty of other startups out there trying to transform manufacturing, many of which are using 3D printing along with other tools of the trade.
Competition Across the Pond
In our piece on Six Manufacturing-as-a-Service Companies, we looked at a number of companies that are dabbling in the manufacturing on demand space, names like Xometry and Fictiv. A reader recently commented that our ethnocentric colored glasses glossed over some names in Europe which were listed as follows (h/t to Paul):
– Plyable for Composites in UK – 500K GBP in seed taken in 2019 according to Crunchbase
– Weerg for AM in Italy – if you’re not in Crunchbase, you don’t exist. Capeesh?
– InstaWerk for CNC in Germany – says they’re Germany’s leading online CNC machining company – order a part in ten clicks
– Tailorsteel for laser cutting in the Netherlands – please see the advice we just gave the Italians.
And we haven’t even talked about what the Chinese are getting up to, or any other Asian country for that matter. Distributed manufacturing today seems very fragmented, and Protolabs is in a good position to keep acquiring as they have been and consolidating the space, which also reduces the number of formidable competitors. So, does it make sense to pick up some shares of PRLB?
To Buy or Not to Buy
One of the many premium subscribers we converse with commented on Protolabs as follows:
There isn’t much growth forecast in earnings per share with a consensus of $2.92 in 2023 giving a P/E of around 35.
Credit: A Nanalyze Subscriber
The first problem here is using forecasts as the input for any valuation ratio. Since many large companies have analysts forecasting their financial outcomes, it’s just become a thing. For us, we pay little attention to forecasts coming from the company (they’re only useful to hold management’s feet to the fire), and especially those coming from MBAs who – like us – spent six figures learning how to make ourselves sound important.
Looking at earnings per share is a look at profitability. Another subscriber reiterated the importance of profitability because “not all revenue is the same,” and we agree. That’s why we’re attracted to software as a service models, or razor blade businesses like Illumina’s got going on. However, we also believe that revenue growth is the single most important metric in the early stages of growth (where little blue ocean TAM has been captured) because that’s where the leaders emerge and start to build moats. Capture as much market share as possible and we’ll worry about margins later.
While there are any number of TAM estimates for distributed manufacturing that reach up to several hundred billion dollars, Protolabs defines their TAM in the $10 to $15 billion dollar range. With less than $500 million in annual revenues, we have no reason to believe that Protolabs has reached what a marathon runner might describe as “the wall.” Their recent acquisition of 3D Hubs helps grow international revenues and provides them with numerous locations in places like China and India – in total, a network of 240 premium manufacturing partners across 20 countries. (Protolabs had about 20% international revenues in 2020.)
Unless the entire digital manufacturing thesis is rubbish, Protolabs should have loads of growth ahead of them while leading the pack. It’s a bonus that they happen to be profitable, but that shouldn’t be the focus. They need to land-grab as much market share as possible.
The Rona card has already been played, and now it’s time to get back to growth. We’ll check in a year from now to see if that growth has resumed.
When we make decisions as investors, they need to be unwavering. We know we will be wrong, we will make mistakes, we will leave money on the table, but we won’t lose money by speculating on what-ifs. Protolabs’ resume shows us they know how to grow their business. The company grew revenues at a compound annual growth rate of +19% for the period of 2013-2019, a major reason why we went long the stock. Now, they need to get back to that happy place ASAP.
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