Charting the Rough Road to Profitability: William Blair Analyst Weighs in on 3D Printing in 2024

Facing a tough market in 2024, 3D printing companies are battling skepticism and challenging economic conditions. Public companies, in particular, are finding it hard to attract interest, with many struggling to maintain their stock prices. Amid this uncertainty, William Blair analyst Brian Drab provides a sharp analysis of the sector’s hurdles and underlying potential.

The IPO Dilemma

In an interview with 3DPrint.com, Drab highlighted the lack of investor appetite for 3D printing stocks, noting that many companies that went public via SPACs (special purpose acquisition companies) in 2020 and 2021 are now trading below a dollar. The initial public offering (IPO) landscape for 3D printing companies has been notably challenging.

“The environment is really difficult. The investors’ view of 3D printing and investor sentiment around 3D printing is at a low, and there’s very little appetite for 3D printing companies in the market right now,” Drab explains. “Investors are not too interested in companies with a $30 million or $100 million market caps and stock prices under a dollar.”

This lack of interest makes it challenging for these companies to gain the necessary support from institutional investors.

Drab also pointed out that some of these companies face additional pressure due to their poor stock performance post-IPO. “Stocks like Velo3D and others that went public through SPAC deals are now struggling, with some trading well below their initial offering prices,” he noted. This poor performance has decreased investor confidence, making it even harder for these companies to raise capital.

The Cost of Capital in a Tough Market

The overall market conditions further complicate the situation. “Higher interest rates have created problems across many industries, not just 3D printing,” stated the analyst. “It makes purchasing capital equipment more expensive, forcing customers to tighten their budgets.”

This economic pressure has directly impacted the sales and performance of companies such as Stratasys, Velo3D, and 3D Systems, which all reported challenges in their recent first-quarter financial results. The expert expects this tough environment to persist into 2024, with potential improvement in 2025 if economic conditions stabilize.

The Key to Resilience: Diversification

Companies like Protolabs and Xometry have managed to navigate these turbulent waters more effectively.

According to Drab, “Those are service companies. Protolabs and Xometry are doing better. Xometry is clearly the one that’s growing the fastest. These companies have a more diversified service offering, including CNC machining, injection molding, and other manufacturing processes, in addition to 3D printing. This broader range of services has provided them with a buffer against the specific challenges faced by pure-play 3D printing companies.”

Both Protolabs and Xometry generate less than a quarter of their revenue in 3D printing, according to the expert. They’re more focused on CNC machining and injection molding, which they perform with high quality and speed, creating essentially unlimited capacity for their customers. This ability to offer a wide range of services quickly and efficiently and to a wide range of industries has positioned these companies to better withstand market volatility and stay strong in the market overall.

Additionally, Drab highlighted the sectors driving demand for these services. “They serve all different industries, from medical devices to aerospace and defense to consumer products and electronics. While there isn’t a major focus area, aerospace and defense have been a bright spot, especially with the innovation around drones and missile technology, which needs to happen quickly.”

The rapid innovation and investment in these sectors, driven by the unfortunate reality of global conflicts, have provided consistent demand for advanced manufacturing technologies, including 3D printing.

The Persistent Challenge of Profitability

Achieving profitability remains a major hurdle for the 3D printing sector. Drab noted that for the industry to regain credibility with investors, companies need to demonstrate sustained profitability. While companies like Xometry are nearing this goal and Protolabs is already profitable, many 3D printing manufacturers struggle with “thin margins” in an increasingly competitive market.

Drab explained that selling equipment in such a competitive landscape is particularly challenging. “The 3D printing companies have proven that it’s very challenging to sell equipment into a very competitive market space that’s only becoming more competitive,” he said.

Over the past 15 years, the number of legitimate players in the industry—selling more than 100 professional-grade printers annually–has surged from around 10 to maybe about 50, intensifying competition and making it difficult for many companies to achieve consistent profits. Moreover, he points out that this increased competition has made it harder to sustain margins and grow, further complicating the path to profitability. This environment highlights the need for 3D printing companies to find new ways to stand out and achieve financial stability.

Looking ahead, Drab expressed an interest in advanced manufacturing technologies: “Digitizing manufacturing and digitizing supply chains are all very interesting. Trends of companies using additive manufacturing technologies along with other advanced processes to get parts to customers quickly are particularly compelling.”

The focus on reducing supply chain complexities and enhancing domestic manufacturing capabilities is expected to drive growth and innovation in the sector. By making parts locally, companies can avoid long wait times and reduce reliance on overseas suppliers. This shift not only speeds up production but also lowers costs, making this an ideal scenario for 3D printing.

This ability to quickly produce and deliver parts can give companies a competitive edge, helping them stand out in a crowded manufacturing market, which is essential as the industry continues to evolve and adapt to a changing economic state.

Stratasys F3300. Image courtesy of Stratasys

Overall, Drab sees a “complex but promising future” for the 3D printing industry. The sector is navigating a landscape marked by investor skepticism, high interest rates, and intense competition. However, there are bright spots, particularly in aerospace and defense, and promising advances in advanced manufacturing technologies. Companies that diversify their offerings and adapt to changing market conditions may find themselves better positioned for sustained growth and profitability.

Please note that the information provided in this analysis is intended for informational purposes only and should not be construed as financial advice or a recommendation to buy or sell stocks or investments. Readers are encouraged to conduct their own research or consult a financial advisor before making any investment decisions.