Materialise (NASDAQ:MTLS) is a technology company that belongs to the industry of additive manufacturing, also known as 3D printing. The company is involved in the provision of proprietary 3D printing software and 3D printing manufacturing solutions, primarily for the medical and automotive industry.
The company offers surgical planning software for the medical industry alongside offering customized implants for orthopedic/cranio-maxillofacial use-cases. On the printing-services side, Materialise produces medical devices, prototypes and production parts for several use cases including medical and automotive. Materialise was incorporated in 1990 and is based in Leuven, Belgium.
The company operates through three segments: Materialise Software, Materialise Medical and Materialise Manufacturing.
Software segment provides interface solutions for 3D printers from, among others, 3D Systems (NYSE:DDD), Arcam AB (OTCPK:AMAVF), Concept Laser GmbH, envisionTEC GmbH and EOS GmbH. Revenue from the software segment comes from licensing and maintenance. The company generated 25% of its total revenue from the software segment during the year-ended 2017. Revenue share from this segment was rather stable at 25% during the last three years.
The company offers its medical-related software and implant printing services through its medical segment. Revenue primarily comes from selling printed medical devices and licensing of medical software. The company’s revenue in the medical segment is concentrated among selling surgical guides and orthopedics-related implants. During the year ended 2017, 30% of the company’s total revenue came from the medical segment.
The manufacturing segment of Materialise is involved in the provision of 3D printing services to industrial customers who prefer outsourcing over in-house printing solutions. The company recently acquired ACTech, a manufacturer of metal parts, to increase its metal printing exposure. During the year ended 2017, 44.7% of the company’s total revenue came from the manufacturing segment.
To review, revenue of Materialise is distributed almost uniformly among three key areas: medical, software and printing services, with manufacturing services taking the lead in revenue generation. Consequently, Materialise is exposed to the growth prospects of software interface, medical and manufacturing services going forward. Based on the industry growth, the revenue projection for the company looks like this for the next several years.
Notes to the table: Revenue projection is based on 25% per year growth in software and services. The medical segment is assumed to grow at 15% per year, in line with the industry forecasts for orthopedics and medical devices.
On the surface, it looks like that Materialise is positioned favorably in the industry. Businesses tend to favor outsource additive manufacturing in order to avoid capital expenditure, which benefits service providers. Moreover, in-house printing also requires training of the workforce and comes with a learning curve. That’s another reason why businesses, especially SMBs, tend to favor on-demand printing services. With nearly half the revenue from printing services, Materialise is set to benefit from the growth of 3D printing services industry.
According to one industry report, the 3D printing software and services market is set to grow at 25.2% per year to reach $4.2 billion by 2021. According to IDC’s Worldwide Spending on 3D Printing Forecast, “Revenues for computer-aided design (CAD) software are forecast to triple over the five-year forecast period while the market for on-demand parts services will nearly match this growth.”
This translates to a growth rate of 31% per year over the forecast period. TechNavio is more optimistic as the research firm sees a 43.7% CAGR in 3D printing services management during 2017 to 2021. It seems that 3D printing software and services is set to grow between 25% per year and 40% per year during the next few years.
Regarding specific markets, orthopedics 3D printing is set to grow at a CAGR of 19.2% during 2017 to 2027, according to a report from Future Market insights. The firm noted that the market will touch $1 billion by 2027. Another report projects the medical devices market to reach $2 billion by 2025, translating into a CAGR of 16.8% during 2017 to 2025.
Further, IDC notes that health care is expected to go to be the second position, with revenue growing in excess of $3 billion by 2021; health care currently ranks fifth, noted IDC in a 3D spending forecast. Overall, the health care and medical devices market is expected to witness high-teens growth during the next few years or so.
What does industry growth mean for Materialise?
The company generates most of its revenue from services followed by medical and software. Due to the potential of industry growth in these specific areas, Materialise is set to post double-digit revenue growth going forward. Moreover, printing services involve relatively less risk than printer OEMs like 3D Systems and Stratasys (NASDAQ:SSYS) as service providers like Materialise can provide their customers with several technologies to choose from. In contrast, OEMs have to convince the customers to use the technology they already have.
The point is that Materialise is better positioned to benefit from the industry growth due to its presence in the services and medical industry, alongside having a competitive advantage of pooling different printing technologies.
The company holds a key competitive advantage in the medical segment
FDA approval creates a competitive advantage for Materialise in the medical software arena. In March, Materialise became the first company to receive the FDA’s approval for software that assists in printing anatomical models. According to the company, 16 out of the top 20 U.S. hospitals have implemented a medical 3D printing strategy using Materialise Mimics technology.
To gain access to this area of medical software, OEMs will probably have to incorporate FDA-compliant software from Materialise in their printers. This creates barriers of entry for other software providers, creating a clear competitive advantage for Materialse in the medical arena.
Materialise is trading at a discount based on forward sales
Based on industry forecasts, Materialise’s revenue can surpass $300 million by 2020, and cross $500 million in 2023. In present value terms, this translates to revenue of $242 million and $354 million, leading to a discounted price-sales ratio of 2.42 and 1.65, respectively. Given that the stock is trading at a price-sales ratio of 3.09, the discounted price-sales indicates that the stock is cheap on a forward sales basis. Note that sales are expected to grow in excess of 20% per year during the next five years or so, yet the stock is priced around two times discounted sales.
Focus Equity Estimates
It looks like the stock is priced cheaply on discounted sales basis. However, sales are not being translated into earnings as of now. Value would only be added if the company registers net-profit at some point of time in the future. It can be argued that as sales grow, contribution margin will increase leading to profitability. Nonetheless, the company has yet to record profitable growth.
What’s the thesis here?
Materialise is exposed to the highest growing segments of 3D printing industry, namely on-demand printing and medical devices. As a services company, it’s favorably positioned in contrast to OEMs amid provision of capital-benefit and extensive technology options for customers.
Although competition is increasing on the medical side, recent FDA approval for the company’s software means that it has some protection in the medical market. Further, the stock is trading around twice discounted sales, which is cheap. The bottom line is that Materialise is a relatively better bet for investors in a competition-filled 3D printing market.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
About the author:
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master’s degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.