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Summary

  • Materialise went public last week, in what has been a disappointing public offering.
  • Earnings are the main pro, yet revenue growth is low, especially in comparison to a fast-growing industry.
  • I will watch this stock from the sidelines.

Materialise (NASDAQ:MTLS) is a provider of additive manufacturing software and 3-D printing services. The Belgian-based company saw its public offering take place last week, which has not been very successful.

While Materialise offers both growth and earnings, the valuation is still way ahead of itself, and growth is relatively weak in a very rapidly growing industry. I remain on the sidelines.

The Public Offering

Materialise services a wide range of industries, as well as consumer products with its software and 3-D printing services. Currently, the Belgian-based company has an installed base of more than 8,000 licenses.

The company has three core competencies focused on the areas of software development, 3-D printing and engineering. Materialise focuses on three key end-markets, which are 3-D printing software, medical, as well as industrial production.

Materialise sold 8.0 million shares for $12 apiece, thereby raising $96 million in gross proceeds. All shares were offered by the company, with no shares being sold by selling shareholders. The pricing of the offering took place right at the low end of the preliminary $12-$14 offering range. At $12 per share, equity in the business is valued at around $565 million.

The underwriting syndicate for this offering consisted of Piper Jaffray, Credit Suisse, BB&T Capital Markets, Janney Montgomery, Stephens and KBC Securities.

Valuation

Within the company's software business, Materialise offers software to other 3-D companies like producers 3-D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS).

Within the medical industry, Materialise offers clinical services which analyze 3-D images of patients, as well as offers medical software which aid in the design of surgical devices and implants. The largest business is the industrial business, where Materialise offers additive manufacturing solutions, as well as specialized services. Among its industrial clients are Ford (NYSE:F) and Boeing (NYSE:BA), among others.

Note that this is an offering of American Depository Receipts, and that Materialise reports its financial statements in euros. The company does provide the dollar-equivalent results in its filings.

For the calendar year of 2013, Materialise posted revenues of $57.2 million, which is up 17.6% on the year before. Interestingly enough, the company did post a $4.7 million profit, more than double the amount in the year before.

Comforting to see, revenue growth accelerated slightly to 19.7% in the first quarter of this year, with revenues coming in at $15.2 million. First-quarter earnings halved to merely $0.1 million.

Before the offering took place, Materialise operated with $16 million in cash and equivalents, while not having debt outstanding. Following the IPO proceeds, Materialise will operate with a net cash position of about $100 million. This gives operating assets of the firm a valuation of about $465 million after backing out the net cash position. This would value operations at 8.1 times 2013's sales and a 100 times earnings.

Investment Thesis

As noted above, the public offering of Materialise has been disappointing. Shares were offered at the low end of the preliminary offering range, and despite seeing some first-day weakness, shares are trading around those levels. At $11.92, shares are still down 8.3%, compared to the midpoint of the preliminary price range.

Investors in 3-D stocks in general have seen huge momentum in recent years, followed by steep corrections earlier this year. From this point of view, the timing of the offering is not the best. Other risks are, of course, the still steep valuation, the relatively modest revenue growth, limited scale of its operations, reliance on key staff and potential litigation risks, especially in the medical area.

On the other hand, revenue growth has been accelerating slightly in the first quarter, but more importantly, the company is reporting solid earnings on its operations. This is very encouraging, yet some of its larger competitors are happy to forfeit short-term earnings to boost growth and market share in this growing market. With the IPO, Materialise will gain much more financial strength to pursue such a similar strategy, to perhaps accelerate revenue growth.

Materialise is not exactly cheap, especially given the slower pace of growth. Note, for instance, that competitor 3-D Systems is valued at $6.2 billion net of cash at $59 per share. This values this competitor at 12 times sales, which is a premium versus Materialize, yet the annual growth rate of 45.2% is much more impressive than the high-teen growth reported by its Belgian counterpart. 3-D is also profitable, yet earnings multiples north of 100 are quite useless for comparison.

The small size might be a drawback, as currently, the future leaders of the industry are being defined. The slower growth will only result in Materialise seeing this market share decline for the near term. Both absolute and relative valuations appear steep as well.

I remain cautious and stay on the sidelines.

Source: Materialise - Disappointing Offering From This Belgian-Based 3-D Printing Business