Xometry is a leader in distributed manufacturing

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The father of sspecial paim aacquisition vscompanies (after-sales services) was recently on the Lex Friedman podcast garnering public sympathy by talking — in that soft voice — about the difficulty of his upbringing. It’s a shame he hasn’t been confronted with the damage he’s done to retail investors while amassing his wealth. Mr. Palihapitiya joined the billionaire club while claiming to democratize access to wealth when the exact opposite was happening. We sounded the alarm bells when the first SPAC offering debuted and we’ve been warning ever since. Retail investors still get the smaller end of the stick, and distributed manufacturing SPACs were no different.

3 Distributed Manufacturing SPACs

Quick shelf stock

Last year we published an article titled Stock Protolabs versus Stock Xometry. And the winner is? which looked at five distributed manufacturing companies, three of which got their start as SPACs.

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One of them was Fast Radius (FSRD), a company Palantir (PLTR) invested in at a valuation of $1.4 billion. Just last week, Fast Radius filed for bankruptcy, leading Palantir shareholders to ask some questions. Indeed, this is something we warned about in August 2021 in our article on Stocks that hold Bitcoin on their balance sheets. Palantir doesn’t have to invest in risky SPACs when they should be focusing on developing their software platform. Palantir’s $20 million investment in Fast Radius is now worth $280,000, a loss of almost 99%. The potential revenue that came with this transaction is also gone.

Shapeways stock

The second worst performing distributed manufacturing stock, Shapeways (SHPW), lost 94% of its value as management is focused on profitability with the $50 million in cash available. After spending $3.5 million last quarter, they have a roughly three-year lead. A gross margin of 51% means there is potentially a profitable business somewhere, but the business has become so small that we would hardly ever consider investing. Management also needs to explain why they promised $86 million in revenue for 2022 but won’t even come close based on the high end of their Q4 2022 guidance.

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An inability to grow revenue and a management team that can’t deliver on promises means this $30 million company now faces possible delisting.

Fathom Digital Manufacturing Stock

The third distributed manufacturing stock on the list – Fathom Digital Manufacturing Corporation (FATH) – lost just 75% and still commands a $334 million valuation. Revenue isn’t what was promised on the SPAC deck, but at least there’s some growth going on (below, we use the upper range of the Q4-2022 forecast to estimate total 2022 revenue).

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Last week, Fathom announced a $1 billion goodwill impairment charge stemming from more than a dozen acquisitions. Management is clearly not very smart at the negotiating table since the companies it has acquired have not achieved the growth they hoped for. Yes, we know, the Rona.

The latest results indicate the company has approximately $31 million in liquidity – $8 million in cash and $23 million on an unused revolving line of credit. While most SPAC projects have left the acquired company with a sizable war chest to weather the bear market, Fathom has little to show for its efforts. Revenue growth has been stagnant for the past six quarters, with 2022 forecast to grow around 7% year-over-year. At least it’s better than Protolabs, a company we talked about a few days ago in an article called Is it finally time to sell Protolabs shares? The answer is sadly yes, which leaves us with the company that stole Protolabs’ leadership crown – Xometry (XMTR).

Xometry is a leader in distributed manufacturing

The biggest news since we last reviewed Xometry was their acquisition of Thomas Publishing Company, which is now reflected as its own segment defined as “Services:”

Vendor services revenue includes the sale of marketing and advertising services and, to a lesser extent, SaaS-based solutions, the sale of supplies and financial services products.

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Legacy activity is labeled “Marketplace revenue” and represents the majority of total revenue (about 80%). In the last quarter, the Services business recorded a gross margin of 78.5% compared to Marketplace at 30%, giving the company a combined gross margin of nearly 40%. Based on the midpoint of the 2022 forecast, they will see year-over-year growth of around 77-78%, which is quite respectable given the macroeconomic headwinds affecting all businesses on the current bear market. The fit-up and expansion strategy appears to be working well as the number of customers paying over $50,000 per year is steadily increasing.

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After growth, our biggest concern is for Xometry to move toward profitability so that it doesn’t need to sell stock or issue debt to fund its operations. Earlier this year, they issued convertible notes due 2027 that raised $287.5 million, giving them cash and marketable securities of approximately $341 million. Over the past four quarters, they’ve averaged losses of around $19 million per quarter, giving them a trail of more than four years. Below, you can see quarterly trends moving in the right direction, with revenue increasing and losses contained.

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An AI tweak

Xometry’s earnings call last week spoke of an unexpected change in a key metric for the company – the time it takes for a supplier to accept an order. Here’s how the process generally works:

  • A Xometry customer requests a quote from Xometry for 12 custom designed brass bongs
  • Xometry AI algorithms provide a competitive quote immediately while accounting for all the big data they generate over time
  • Xometry customer accepts quote
  • Xometry offers work to over 600,000 manufacturers (in the US alone).
  • Presumably, they adjust the price down until a supplier agrees. Acceptance of this job occurs 36% faster.

This means the cost of goods sold is down for Xometry, as faster acceptance implies a willingness to do the job for less. As costs drop, Xometry’s AI algorithms begin to reduce future customer quotes in response. This drop in bid prices is now translating into lower revenue, and Xometry thinks that will balance out early next year. The company says that “the combination of price optimization and higher order frequency will increase our revenue per buyer in early 2023,” implying that cost reduction will attract more customers.

Protolabs explains how they should respond to price pressure, while Xometry’s AI algorithms make it happen in real time, it seems. If Xometry can compete on cost as market forces dictate, they should be able to steal market share from competitors who cannot. It also shows how suppliers – the small machine shops that do all the work – have strong control over pricing based on their willingness to accept work from Xometry.

Conclusion

3D printing is one of those technology themes that never realized potential investors imagined. Metal 3D printing saw decent adoption, while the distributed manufacturing theme started out with Protolabs in the lead until their revenue stagnated. Now Xometry looks set to surpass them. With enough cash in their coffers to survive for several years, Xometry will be in an ideal position if revenues continue to grow in the face of macroeconomic headwinds while profitability is achieved in the second half of 2023 as the company expects.

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