ExOne (NASDAQ: XONE) launched its IPO during the height of the 3D printing craze in 2013, and the timing couldn't have been better. Shares gained over 150% in their first few months of trading. But the irrational exuberance that propelled 3D printing stocks to insane valuations faded as quickly as it arrived, which gave the metal printing company a brutal introduction to life on the public markets. Shares have lost nearly half of their value since the IPO.
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That doesn't mean the company is completely bereft of potential, though. In fact, the technology ecosystem for 3D metal printing -- metal powders, machines, end-to-end processes, and so on -- has achieved tremendous progress in recent years on the heels of major investments from General Electric, Allegheny Technologies, and Arconic. Since the health of the entire ecosystem, not the novelty of a single technology platform, is what ultimately drives long-term success, the prospects for ExOne are the brightest they've ever been.
While that's all well and good, investors are still left with one important question: When will the company finally start making money?
Image source: Getty Images.
Poised for a breakout?
A healthier ecosystem helped ExOne start 2017 on the right foot. The company reports two segments: (1) 3D printing machines and (2) 3D-printed products, materials, and services. While both segments reported growth in the most recent period, the former has historically had the greatest effect on quarterly performance because each printer is really expensive, and the timing of sales doesn't follow a neat and tidy trend.
The dependence on the machine segment has been one of the single biggest criticisms of the stock (deservedly so), since the company needs to sell many more printers, and more routinely, to offset fixed expenses. Without achieving that, ExOne will likely never become profitable with its current business model.
The bad news is that the trend held at the start of this year. First-quarter 2017 revenue grew 29% compared to the year-ago period, driven by a 95% increase in printer sales. The good news is that there are signs the business is on the cusp of breaking out. Consider a few important metrics from the most recent quarter:
Data source: ExOne.
The strong start provided all of the confidence management needed to reaffirm its full-year 2017 financial guidance, which calls for at least 25% revenue growth and positive adjusted EBITDA by the end of the year. Furthermore, CEO Jim McCarley expects ExOne to grow revenue at least 25% year over year for the foreseeable future. That would be a remarkable achievement, especially considering that the company grew revenue just 21% in the three years from 2013 to 2016.
But will it be enough to usher in profitable operations anytime soon? That appears less certain. In the last four quarters, ExOne reported $50.3 million in revenue at a gross profit margin of about 28%. Selling, general, and administrative expenses and R&D costs totaled roughly $30 million in the same span. That leads to a pretty simple calculation for investors to get an idea of what level of annual revenue would be needed to at least cover operating expenses.
Simply take all operating expenses except the cost of revenue (for ExOne, that is only SG&A and R&D, or about $30 million) and divide by the gross margin (roughly 28%) to arrive at $107 million. In other words, the 3D printing stock won't become profitable until it generates at least $107 million in annual revenue -- and that assumes SG&A and R&D expenses don't increase as the company grows, which is probably an unlikely expectation.
If McCarley is right that ExOne can grow annual revenue by at least 25% for the foreseeable future, then we can calculate approximately when the company will achieve this level of revenue.
Data source: Google Finance, calculations by author.
What does it mean for investors?
The good news is that the predicted growth rate, if achieved, puts ExOne well on its way to profitable operations. The not-so-good news is that investors may need to wait until the end of 2020 to see it. Of course, anything can happen in the next three-and-a-half years, from the arrival of new technologies (the start-up Desktop Metal promises to provide meaningful competition in 2018) to a more aggressive approach by management (could the company double down on selling metal powders to grow nonmachine revenue?). That means investors will need to be patient and remain aware of industrywide changes to increase their chances of success.
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