January 6, 2022

The market is a bit of a mess, but the selloff has created opportunities to pick up shares in high-growth small- cap names at what seems like extremely attractive prices.

Today’s recommendation is one of those names. It’s a marketplace company that is revolutionizing the outdated industrial manufacturing industry.

While the stock hasn’t been immune to bouts of market volatility it has been far more stable lately than most other high-growth names. It’s up over the last three weeks! And it offers investors exposure to an industry that is seen rebounding in 2022 and 2023.

Enjoy!

Company Overview

The Big Idea
As we’ve all learned, manufacturing networks and supply chains are insanely complicated. Inefficiencies are amplified throughout the network as one little hiccup gives the entire system a major cold.

There are several reasons for this.

First, manufacturing is a very fragmented industry. Looking just at the U.S. there are over 625,000 manufacturers. Three-quarters of them employ fewer than 20 people. Not a lot of wiggle room to absorb disruptions.

Moreover, the digital technologies that have helped so many other industries become more efficient are often absent when it comes to industrial manufacturing.

That makes it tough for buyers to find suppliers with uniform manufacturing processes, transparent pricing and clear delivery times. Finding local suppliers with those characteristics can be nearly impossible.

As a result, many engineers, designers, companies, etc. have relied on small local machine shops and in-house production capabilities to source the parts they need to build things. But here too there are challenges. One new product might require equipment that serves just one purpose – like molding a plastic part. Just getting that equipment sourced, built and installed is a project that distracts from completing the task at hand, which in this example is assembling the end product that the plastic molded part goes into.

Even when there is an existing relationship with a trusted supplier getting from concept to finished product can be a long and arduous journey. Due diligence, proposals, design changes, pricing updates, sorting out pricing per unit, etc. The list of steps in the process goes on.

In response to these issues, a few companies have popped up that offer things like on-demand 3D printing, CNC manufacturing and injection molding. This represents progress, but buyers – especially those of any size – often make and sell products that require several parts. And different parts/products often require different manufacturing processes.

What they really need is a one-stop shop for all their industrial manufacturing needs.

That’s exactly what today’s recommendation offers.

This company has built a marketplace that efficiently matches manufacturing supply with dynamic demand across a half dozen of the most sought-after manufacturing processes.

It’s a neat story. And after a selloff from 2021 highs the stock appears like a good buy right now.

New Recommendation and Updates

The Company
Xometry (XMTR) operates a digital marketplace that addresses many buyer and seller pain points in the archaic $260 billion industrial manufacturing industry. The AI-powered platform allows manufacturers to visit Xometry’s website, upload a 3D design (i.e., a CAD file) and retrieve an instant quote for the necessary parts from Xometry’s supplier network. Front door delivery and product quality are guaranteed.

The on-demand, two-sided platform is one of the more impressive digitization initiatives in the manufacturing supply chain. High level, Xometry offers the convenience, simplicity and transparency that could move manufacturing into the 21^st century.

More specifically, Xometry can help slash the lengthy, in-person visits and pricing opacity that have plagued the industry, especially during the pandemic.

The platform improves pricing accuracy, helps buyers source parts beyond their local network, provides revenue opportunities for sellers that extends beyond regional demand and gives large companies an enterprise-wide solution that creates work-flow efficiencies.

As JP Morgan wrote, Xometry is looking to become the Amazon (AMZN) of manufacturing, offering a global marketplace with variety and clear pricing that more efficiently matches manufacturing supply with dynamic demand.

Xometry was founded in 2013 by Randy Altschuler (current CEO) and Laurence Zuriff. It initially focused on the U.S. market and has since expanded operations into both Europe and Asia.

Buyers are engineers, product designers, procurement and supply chain personnel, inventors and owners of businesses of all sizes. Over six million parts have flowed through the platform

As of the end of Q3 2021 the company had 26,187 active buyers (up 61% over Q3 2020 and up 9% over Q2 2021). Accounts spending over $50,000 grew by 67% to 603 (up 19% over the previous quarter). These larger buyers drove 96% of revenue.

In short, this company, which has a market cap of $2.4 billion, is growing quickly and seems to have great momentum going into 2022.

Platform & Products
Xometry offers a two-sided industrial manufacturing platform that brings buyers and sellers together. The platform offers solutions across six (and growing) manufacturing processes. For each process the company offers a variety of materials, finishes, tolerances, markings and certifications.

Here a few notes on each process:

Urethane Casting: Rigid plastic or rubber parts with production-level quality. Used when color, surface quality and toughness are needed.

Computer Numerical Controlled (CNC) Manufacturing: CNC machines use automated, high-speed cutting tools to precision cut almost any metal alloy and rigid plastic in large or small volumes. CNC-machined parts are used across all industries (aerospace, medical, electronics, industrial, medical, etc.). Xometry can quote CNC machined parts for basic aluminum and acetal parts, or more sophisticated titanium and engineered plastic parts.

Injection Molding: Most cost-effective way to make plastic parts at scale. Xometry has an extensive injection molding supplier network so buyers can get the exact parts they need, with clear pricing, in both on-demand prototyping or production scenarios.

Sheet Metal Manufacturing: Sheet metal parts (think chassis, enclosures, brackets, etc.) are valued for their precision and durability across industries. Xometry has a network of domestic and overseas fabricators that can supply any quantity of parts from 3D CAD files or engineering drawings.

Die Casting: A versatile, reliable and accurate manufacturing process used when high volumes of complex metal parts are needed.

3D Printing: A layer-by-layer manufacturing process where materials are fused together to make objects from a CAD file. Xometry’s supplier network can build objects in plastic, photopolymers, reaction polymers, composites, metal, glass and other materials.

Laser and Waterjet Cutting: New additions to the Xometry platform, laser and waterjet cutting are used to create profile cuts on sheets.

To receive a project bid, buyers submit their requirements via 3D design file and specify any customization (material, aesthetics, etc.) as well as the quantity needed. The platform sends the request out to potential suppliers. Buyers then receive near-instant pricing for doorstep delivery and guaranteed quality.

This AI-enabled platform is continuously learning. Each order provides more data. As more buyers join, more sellers are attracted by project postings, which then drives more sellers to join. More transactions create more data for machine learning algorithms and help to improve pricing accuracy. The flywheel keeps spinning, giving Xometry the opportunity to introduce new products and improve existing services.

Xometry also offers additional products and services to both sides of the marketplace through Xometry Seller Services. These include Xometry Supplies (tools, maintenance supplies, etc.), Xometry Advance Card (gives sellers up to 30% of job payment in advance), Fast Pay (fee-based service for sellers to get accelerated payment) and more.

The recent acquisition of Thomas (closed December 1, 2021, for $300 million) represents a major step forward for Xometry as a sourcing destination for buyers, especially large buyers.

Thomas (thomasnet.com) is a well-known industrial sourcing and marketing platform that connects 1.3 million registered buyers (growing at an average annual rate of 23% since 2018), engineers and MRO professions to over 500,000 North American suppliers. Supplier goods span 70,000 industrial categories. Roughly 93% of Fortune 1000 source suppliers are on Thomas and it has 45,000 certified registered sellers.

Growth Initiatives
Digital Transformation for Outdated Industry: Xometry is a potentially disruptive platform for an inefficient and outdated industry plagued by unreliable supply chains, long lead times and opaque pricing. This has driven buyers to build in-house capabilities or work with small networks to source materials, which further limits options. Xometry is arguably best positioned to turn this industry on its head.

Thomas Acquisition: The addition of Thomas massively expands Xometry’s buyer/seller network and increases Xometry’s visibility among large buyers. The potential positive network effect is hard to overestimate, assuming integration is done well. Thomas is a slow-growth business (+3%) that generated $67 million in revenue over the last twelve months. Thomas has 85% gross margins, well above that of Xometry, which is closer to 25% gross margin.

Management expects the addition of higher-margin revenue to add 10% to Xometry’s long-term gross margin profile (now targeting 40% to 45%, up from 30% to 35%). With a strong marketing engine (which Thomas lacked) Xometry should be able to unlock new growth opportunities that Thomas was unable to pursue.

International Expansion: The vast majority of 2020 revenue came from the U.S. (98%) but should decline to around 93% by 2023 as Xometry grows international operations.

The Business Model
Xometry operates a two-sided marketplace for buyers and sellers in the industrial manufacturing industry. Revenue reflects the “take rate” on orders plus a small portion of fees from seller services. Revenue is largely driven by active buyers, larger accounts (+$50,000 over a 12-month period) and revenue from existing accounts.

The Bottom Line
In 2020 Xometry grew revenue by 76% to $141 million. Adjusted EPS was -$0.67.

Revenue through the first three quarters of 2021 was $151.2 million. Q4 2021 guidance of $60 – $62 million implies full-year 2021 revenue should be up roughly 50% to $211 million. Adjusted EPS should be around $-2.00.

In 2022, factoring in the Thomas acquisition, revenue growth could top 80%, putting total revenue in the $390 – $400 million range. Adjusted EPS could improve meaningfully to around $-0.30, depending on how things shake out with Thomas. Active buyers is seen rising 65% to 42,650.

Risk
Algorithm Risk: As more variables are plugged into algorithms they become more complex. Xometry’s on-demand pricing model will need continuous improvement to maintain accuracy and expand profit margins.

Geographic Expansion: Xometry is expanding into China and Europe. Execution risk is further complicated by the ongoing uncertainties of operating in an unpredictable Covid-19 recovery.

COVID-19: Xometry isn’t immune to supply-chain disruptions. If Covid-19 variants continue to surface they could impact buyers’ and suppliers’ abilities to fulfill their commitments.

Fulfillment Risk: While Xometry offers quality assurance to buyers, it uses 3^rd party fulfillment services, which creates some risk if it can’t deliver on price and quality.

M&A Integration: Thomas is a greater than 100-year-old company and there is always some risk of culture clash. Integrating the platforms also poses some risk. On the heels of Thomas, we should expect some additional M&A as well.

Competition
Xometry’s biggest competition comes from in-house production lines. A few companies offer one or two of the processes Xometry offers, but none operate nearly as comprehensive of a platform. Notable competitors include Fast Radius, Stratasys Direct (SSYS), Proto Labs (PRLB), Hawk Ridge Systems and Divergent 3D.

The Stock
Trading Volume: XMTR trades an average of 337,000 shares daily (roughly $18 million). The last bout of high-volume trading (+ 1 million shares) was a few days around the Q3 2021 earnings release in mid-November.

Historical Price: XMTR came public at 44 on June 30, 2021. The stock jumped 99% the first day to close at 87.4. It then traded down into the 60 – 70 range for a few weeks before a run back to 83 by August 2. After that XMTR’s pattern was one of lower lows and lower highs as the stock went on a three-and-a-half-month slide that appears to have ended in mid-December. At that point XMTR retested the November low of 40. Over the last three weeks XMTR has moved consistently higher and is now trading 35% above its lows. Notably, lockup expiration passed on December 27 and XMTR has been relatively strong this week.

Valuation: XMTR trades at an EV/Forward Revenue multiple near 4.35. That is an undemanding valuation for a marketplace stock, let alone higher-growth software names that frequently have double-digit multiples. XMTR should have 50% to 100% upside over the next twelve months.

Buy Range: Expect to buy between 50 and 60 in the near term. We’d likely still be buyers down to 40 (-24% from here) while a breach of that level would likely have us move to the sideline.

The Next Event: Management will attend the Needham Virtual Growth Conference on January 14. Q4 2021 results are expected in late January or early February.

Updates on Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for February 3, 2022.