Velo3D: Proprietary PBF technology sets it apart from the competition (NYSE:VLD)

Working 3D printer closeup.  Print 3D printer object.  Plastic Wire Filament.

Marina_Skoropadskaya

summary

I recommend a buy recommendation for Velod3D (NYSE:VLD). With the transition from subtractive manufacturing [SM] to additive manufacturing [AM] In the industrial manufacturing industry, companies in the AM industry have a tremendous business opportunity.

By focusing on it producing very specific parts that are difficult to make and cannot be made cheaply, VLD can win by being a monopoly and capturing a huge market base before any competition emerges.

company overview

VLD is a digital manufacturing company that uses AM to manufacture complex, mission-critical parts. VLD’s full-stack hardware and software solutions based on their patented Power Bed Fusion [PBF] Technology, are so advanced that their competitors using older solutions can only copy them by remodeling their production lines or expanding their assembly facility.

VLD’s products have the ability to design and manufacture metal parts previously thought impossible with AM. VLD’s products ensure ease of design and production. They are used by customers in the defense, aerospace, space, energy and industrial markets.

VLD’s versatile hardware and software AM solutions are sold through two models:

  1. 3D printer sales processing: structured as a fixed price for the entire system.
  2. Recurring payment transaction: Split into two, a 3D printer lease transaction and a sale and usage fee transaction.

See VLD S-1 for more information about the industry.

Multiple benefits for additive manufacturing manufacturers

The use of AM in direct product manufacturing offers companies a number of advantages. The benefits are directly caused by:

  • supply chain efficiency,
  • End-to-end sourcing control of inputs and
  • Speeding up the cycle from conception to production.

VLD claims that their technology can deliver the following unique features that cannot be delivered by other AM solutions:

  1. VLD’s solutions enable the design of high-quality metal parts aimed at performance and optimal functional efficiency. This was not possible with previous technologies, where the complexity of a part’s design would result in higher production costs.
  2. VLD’s solutions provide a shortcut to the qualification, validation and production of parts that would otherwise take a long time to manufacture. This simplifies and enables the manufacture of parts on demand. This in turn reduces the need to stock the parts at different locations, thereby reducing inventory requirements. This lowers inventory management costs and offers higher potential cash flow.
  3. Consolidating thousands of metal parts into a simple, complex print assembly reduces labor costs, saves time that would have been spent on final part production, and also eliminates post-processing costs.
  4. Subtractive manufacturing processes produce more waste than additive manufacturing. As a result, only the required amount of raw materials is transported, resulting in reduced transport costs. Additive manufacturing enables complex designs with reduced part weight. The combination of these two attributes is of great value to VLD’s customers in the space, defence, aeronautics, energy and industrial sectors.

VLD targets markets with less competition

VLD does not compete in markets whose solutions can be offered by existing competitors. They focus on markets where only the strongest solutions are needed. This ensures they only deal with high-quality, long-term customers with little to no competition.

VLD has targeted customers who require highly specific and complex parts. These parts can only be manufactured using VLD’s PBF technology, not that of the competition. The production processes of VLD’s competitors require support for the complex internal geometries of these highly specific parts. Likewise, resorting to traditional manufacturers results in low-performing parts being produced at high cost and increased wait time.

Land and expand strategy to extend growth runway

VLD employs a two-step process to engage customers and strengthen customer relationships:

  1. VLD validates their technology with the customer before integrating it into their designs and production processes.
  2. Upon successful validation, VLD’s sales and engineering staff work with their customer’s equivalent to determine how VLD’s technology can maximize the customer’s process and product.

Together, both steps help the customer to better understand the potential and freedom that VLD’s product has to offer. Customers often fully integrate VLD’s technology into their processes, which gives VLD the opportunity to sell them something different.

In addition, small groups of sales and engineering personnel can operate a large number of machines through joint efforts. By integrating their technology into their customers’ processes, VLD is able to serve a huge, uncontested market.

Proprietary PBF technology

VLD’s technology delivers what AM promises. Their technology gives customers the freedom to develop complex products with high performance. This technology also allows multiple pieces of metal to be assembled into a stronger, lighter, and higher performing component at a relatively lower cost than traditional metal fabrication techniques.

Other AM solutions are limited compared to VLDs. This is because they use internal support to enable the production of metal parts with complex internal geometries. VLD’s proprietary PBF can manufacture these metal parts without internal support. Manufacturers turn to AM for high-performance products because products made by AM have better performance, are made at a lower cost, and can be made in a short time.

The solutions from VLD enable the needs-based production of high-quality spare parts in small quantities. This leads directly to a lower inventory requirement. With all these factors, VLD controls an undisputed market in which they are well positioned to serve.

One stop shop

VLD’s solutions can be easily integrated into customers’ operations. This makes it easy to add new customers or install additional systems for existing customers. The ready-to-use nature of their products also allows for a land-and-expand strategy. A dedicated engineer is available for several weeks around the time of installation to educate customers on how to use VLD’s products and how these products can best serve the customer.

After installation, the customer occasionally receives support from VLD’s sales and engineering staff. This allows staff to be reallocated to new customers, allowing VLD to scale its operations faster.

3Q earnings

Overall I think VLD is still on the right track. While not that meaningful in the grand scheme of things, Q3 revenue continued to grow >100% to $19 million and this was supported by a strong backlog of demand ($66 million cumulative with Q3 bookings quarter of $27 million). All of this points to increased momentum in acquiring new customers and market opportunities, particularly for Europe’s two leading aerospace OEMs.

What I have to stress is that the focus is really on the long term, and whatever happens in the short term, there is a lot of volatility that investors have to endure. For example, the problem of supply chain disruption is a big problem and has affected the progress of VLD production. While management mentioned that it has secured all the required parts for 4Q, the challenge remains for next year. The direct impact of this is delaying first commercial production (which I think many investors are focusing on as it would delay the timing of any future cash flows).

Regarding the forecast, VLD still expects revenue in the range of $75 million to $80 million.

valuation

I believe the current valuation does not reflect the long-term potential value of VLD. I expect VLD to post FY36 sales of $15.5 billion, which translates to a market cap of $62 billion and a share price of $335 in FY36, or $80 after a discount of corresponds to 10%.

Assumptions:

  1. Through FY26, sales are in line with management’s forecast, but thereafter they will track inflation at a slower pace over the next decade. According to this theory, once VLD has matured and the simple profits have been realized, its growth should slow down.
  2. Similar to revenue, I used management’s EBITDA estimates for the early years and assumed that the margin would slowly increase to 40% over the years as a result of further cost rationalization.

The most important point I would like to emphasize is that I believe that the management could achieve its goals. According to my analysis, investors have a window of opportunity because the market is not yet reflecting any of these potential benefits.

valuation

Own calculations

projections

SPAC deck

risks

3D printing adoption may not materialize

Even as the industrial manufacturing market shifts towards AM, it is still saturated with conventional manufacturing processes. VLD may not be able to properly convince potential customers of the benefits of AM, thereby reducing AM market adoption. With low acceptance, the level of sales of VLD decreases, which directly affects the operating results.

Potential for more competition

VLD’s competitors are constantly researching, designing and developing other products and services that may render VLD’s products obsolete or uneconomical. The AM industry is highly fragmented and highly competitive.

Conclusion

The current valuation offers investors an amazing opportunity to take advantage of a huge mispricing. Despite the high level of competition in the AM industry, VLD has positioned itself unbeatable by offering its customers a total service. By engaging a sales team and identifying the best customer value of its solutions, VLD is positioning itself as a unique product and service provider in the AM industry. The integration of their technologies into those of the customers also guarantees a long-term business relationship.

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