Velo3D: Proprietary PBF Technology Sets It Apart From the Competition (NYSE:VLD)

Working 3d printer close-up.  Print 3D printer object.  Plastic thread filament.

Marina_Skoropadskaya

Summary

I recommend a purchase evaluation on Velod3D (NYSE:VLD). With the transition from subtractive manufacturing [SM] to additive manufacturing [AM] in the industrial manufacturing sector, companies in the AM sector have a huge business opportunity.

Focusing on manufacturing very specific parts that are difficult to make and cannot be made cheaply, VLD stands to gain by being a monopoly and capturing a huge market base before any competition arises.

Company description

VLD is a digital manufacturing company that uses AM to produce complex and mission-critical parts. VLD’s full-stack hardware and software solutions, which are based on the patented feed bed fusion [PBF] technology, are so advanced that their competitors using legacy solutions can only copy them by redesigning their production lines or adding to their assembly setup.

VLD products have the ability to design and manufacture metal parts that were previously considered impossible to produce with AM. VLD products guarantee ease of design and production. They are used by customers in the defense, aviation, space, energy and industrial markets.

VLD’s complete hardware and software AM solutions are sold under two models:

  1. 3D Printer Sales Transaction: Structured as a fixed price for the entire system.
  2. Recurring Payment Transaction: Split into two, a leased 3D printer transaction and a sales and use fee transaction.

For more information on the sector, please refer to VLD S-1.

Several benefits for manufacturers from additive manufacturing

The use of AM in the direct production of products provides companies with a number of benefits. The benefits are caused directly by:

  • Supply chain efficiencies,
  • End-to-end sourcing control of inputs e
  • Accelerate the cycle from conceptualization to production.

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

  1. VLD solutions enable the design of high-value metal parts aiming for optimal functional efficiency and performance. This has not been possible in previous technologies, where the complexity of a part’s design would result in a higher manufacturing cost.
  2. VLD solutions provide a shortcut to qualify, validate and produce parts that might otherwise take a long time to produce. This way, making parts on demand is made easy and possible. This in turn reduces the need to stock the parts in different locations, thus reducing the need for inventory. This reduces inventory management costs and has a higher potential cash flow.
  3. Consolidating thousands of metal parts into a simple and complex print assembly reduces labor costs, saves time that would have been spent producing the final part, and also eliminates post-processing costs.
  4. Subtractive manufacturing methods produce more waste material than additive manufacturing. This means that only the necessary amount of raw materials is transported, resulting in lower transport costs. Additive manufacturing enables complex designs with low part weights. Both of these features combined are of great value to VLD’s customers in the space, defense, aviation, energy and industrial markets.

VLD targets markets that have less competition

VLD does not compete in markets whose solutions can be provided by existing competitors. They focus on markets where only the most robust solutions are required. This ensures that they only deal with high-end, long-term clients with little to no competition.

VLD caters to customers who require highly specific and complex parts. These parts can only be produced with VLD’s PBF technology, not with that of the competition. The manufacturing processes of VLD’s competitors require support for the complex internal geometries of these highly specific parts. Similarly, reliance on traditional manufacturers will result in low-performance parts produced at a high cost and longer lead times.

Land and expand strategy to extend growth runway

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

  1. VLD validates its technology with the customer before integrating it into designs and manufacturing processes.
  2. Following successful validation, VLD’s sales and technical staff work with the customer equivalent to identify how VLD’s technology can add the most value to the customer’s process and product.

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

Additionally, small groups of sales and engineering personnel can service large numbers of machines through collaborative efforts. By integrating its technology into its customers’ processes, VLD is able to serve a huge and unchallenged market.

PBF proprietary technology

VLD’s technology lives up to the AM promise. Their technology gives customers the freedom to design complex products with high performance. This technology also allows multiple metal parts to be assembled into a single stronger, lighter, better performing part at a relatively lower cost than traditional metal manufacturing techniques.

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

VLD’s solutions enable on-demand production of high-value, low-volume spare parts. This directly translates into less need for inventory. With all these factors, VLD controls an unchallenged market in which it is well positioned to serve.

Single window

VLD solutions are easy to integrate with customers’ operations. This makes it easy to adopt new customers or install additional systems for existing customers. The out-of-the-box nature of their products also allows for a land and expansion strategy. A fully dedicated technician is available for several weeks upon installation to educate customers on how to use VLD products and find out how these products can best serve the customer.

After installation, the customer receives occasional support from VLD’s sales and technical staff. This allows staff to be assigned to new customers, therefore enabling VLD to scale its operations faster.

earnings 3Q

Overall, I think VLD is still on the right track. While not as significant in the overall scheme of things, Q3 revenue continued to grow >100% to $19 million, and this was supported by a strong demand backlog (cumulative $66 million with Q3 bookings of $27 million). All of this points to increased momentum in customer acquisition and market opportunities, especially for Europe’s top two aerospace OEMs.

What I would like to point out is that the focus is really on the long term and whatever happens in the short term is a lot of volatility that investors have to put up with. For example, the supply chain disruption issue is a major thing and has affected the progress of VLD production. While management said they’ve secured all the parts needed for 4Q, the challenge remains for next year. The direct impact of this is the delay of the first commercial production (which is what many investors are focusing on, in my opinion, as this would delay the timing of all future cash flows).

In terms of guidance, VLD continues to expect revenue of between $75 million and $80 million.

Assessment

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

Hypothesis:

  1. Until FY26, sales will follow the path management expects, but will slow thereafter to keep pace with inflation over the next decade. Once the VLD reaches maturity and the easy winnings have been achieved, growth should slow down, according to this theory.
  2. Similar to revenue, I used management’s EBITDA estimates for the first few years and assumed that the margin would creep up to 40% over the years due to further cost rationalization.

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

Assessment

Own calculations

Projections

SPAC deck

Risks

Adoption for 3D printing may not materialize

Even though the industrial manufacturing market is shifting towards AM, it is still saturated with conventional manufacturing processes. VLD may not be able to adequately convince potential customers of the benefits of AM, thus reducing the market acceptance of AM. With low acceptance, the level of sales of VLDs will decrease, directly affecting their operating results.

Potential for more competition

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

Conclusion

The current valuation presents investors with an incredible opportunity to take advantage of a huge pricing error. Despite the high level of competition in the AM sector, VLD has positioned itself as unbeatable by offering a full service to its customers. By engaging a sales team and discovering how much its solutions can be of value to customers, VLD positions itself as a unique product and service provider in the AM industry. The integration of their technologies with those of customers also ensures a long-term business relationship.

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