Does The ExOne IPO Offer Any Value?

| About: ExOne (XONE)
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After a 47% gain on the opening day and another huge follow-on gain Friday, does ExOne (NASDAQ:XONE) offer any value now? First, investors need to understand that the company competes in the ultra hot 3D printing sector with the likes of 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS). Second, the company is a throw back to the old technology IPOs with a revenue base of only $30M in 2012.

The company focuses on manufacturing and selling 3D printing machines for industrial customers and printing products to specification for customers using in-house 3D printing machines. The company has Production Service Centers (PSCs) located in the United States, Germany and Japan. It also supplies consumables and replacement parts for the machines to print products.

The stock provides the unique opportunity of investing in a very small company prior to massive growth. While ExOne priced with a market value of roughly $240M, both 3D Systems and Stratasys already approach the $4B mark. While market cap is no sure sign of future gains, it is much easier to grow from $300M to $3B than from $3B to $30B.

IPO Details

This IPO is another perfect example of where the process doesn't work. The stock priced at $18 yet opened at $23.50 leaving a large portion of the gains to the investors that got into the offering. Being that this stock was in the hot 3D printing market, investors could've easily predicted a large bump like this.

The company raised $92M by offering 5.48M shares at $18, above the high end of the original range of $14 to $16. Included in the amount is the over-allotment option that naturally the underwriters will execute of 483K shares. A selling stockholder will sell up to 991K shares if the over-allotment is fully exercised.

With only 13.3M shares outstanding, the firm still only has a market value of just under $400M even after the surging stock price. Sales surged during Q4 to $12M, yet the stock trades at over 13x total 2012 revenue. If the company is able to maintain the Q4 run rate, the stock is valued at a more reasonable 8x revenue.

Small Installed Based But Growing

The company only sold 8 3D printer machines during Q4 providing for huge upside yet highlighting the risk involved in a very small company. Prior to Q4, the company had only sold 5 machines during the first nine months of 2012. It only sold a total of 4 machines for all of 2010 and 2011. In essence, it only sold 9 machines in the 7 quarters prior to Q4.

While Q4 saw a massive surge in shipped machines, the backlog for both the end of 2011 and 2012 was equal at 6 machines. The backlog doesn't suggest that the Q4 surge will be maintained.

The company expects to use the IPO proceeds to build out the PSCs base from the current 5 locations to 15 locations all over the world by 2015. Considering all customers including machine buyers begin at the PSCs, expanding this network will be crucial for further growth.

In addition, the company expects to dramatically extend the consumable material based from steel, bronze, silica sand, and glass to titanium, tungsten, carbide, aluminum, and magnesium. The expectations are for consumables to account for 50% of the revenue base so expanding the offerings will be as crucial as machine sales.

On top of that, ExOne plans to double the direct sales force in order to penetrate new customers.

Any Market Advantage?

The company focuses completely on the industrial market while the much bigger public brethren have a more diversified stream of customers. 3D Systems offers a $1,000 printer called the Cube affordable for desktop usage for professionals or even the affluent home consumer. It also offers the iPro 9000 XL that builds large, accurate parts up to 60 inches (1524 mm) long.

Stratasys as well focuses on a plethora of desktop, design, and production systems. The large production systems focus on precision technology for the highest accuracy and repeatability.

Both companies have large revenue bases from industrial customers looking for rapid prototyping or even small-scale production runs, but customers also include marketplaces such as Shapeways that focus on designers for jewelry and iPhone cases.

An investor will have a difficult time deriving the company with the best technology and it might not even matter in the end. With the wide plethora of printers and consumables, it ultimately could come down to the ability of one company to lower the cost or which company has the best sales team. After all, a bell doesn't go off alerting customers to the best printers rather the best sales team convinces them of the best machine whether best suited or not.

Stock Valuations

After huge stock gains in the last year, both 3D Systems and Stratasys now trade at over 40x forward earnings estimates. While ExOne was EBITDA negative for the first nine months of 2012, that was prior to the surging revenue in Q4. Further details on whether the higher sales grew margins will be key on evaluating the stock.

The stock currently trades at similar revenue multiples to the big boys in the sector. If the company can expand on the surging growth in Q4, the valuation might appear small in a year.


Based on the stock surging to over $30 by the close on Friday, investors clearly should've bought the stock on the opening. The combination of a hot sector and a small share base should continue pushing this stock higher for now. Questions will remain whether the Q4 surge in demand will continue considering the flat year-over-year backlog.

The unique position of selling roughly 37% of the outstanding shares is unprecedented in the recent IPO markets. Also worth noting is that the enterprise value is only around $300M with the proceeds from the offering.

As with any IPO, the first quarterly report after the offering will be crucial to gauge the real value of the company. The ability to improve the bottom line will be greatly watched by investors while guidance could prove disappointing to investors expecting a repeat of the machine shipment surge in Q4.

The stock might continue the surge next week, but several potential pitfalls exist.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please consult your financial advisor before making any investment decisions.