3-D Printing Company Materialise Prices IPO and Is Expected to Begin Trading on June 24

The 3-D printing stocks have taken a bruising in 2014, but that's not stopping Belgium-based Materialise from throwing its hat into the publicly traded ring. IPO terms were released last week, so we can now explore these questions: Does this soon-to-be public player appear to be a potentially attractive investment? And how will its valuation stack up against those of 3D Systems (DDD -2.59%),Stratasys (SSYS -1.61%), and the other smaller 3-D printing companies?

IPO details
Materialise will trade on the Nasdaq under the ticker MTLS. It's expected to begin trading on or about Tuesday, June 24.

Pricing is planned in the range of $12-$14 per American depository share, which at the midpoint would raise $104 million, as 8.0 million shares will be offered. The company currently has 39,072,056 million ordinary shares outstanding, so it will have just over 47 million shares outstanding after the IPO. Each ADS is equal to one ordinary share. Pricing at the midpoint values the company at $612 million.

Materialise's Belgium service center. Source: Materialise

Materialise's business
Materialise NV is a leading provider of 3-D printing software and printing services. The company doesn't make 3-D printers. This fact alone separates it from the other major publicly traded pure-play 3-D printing companies listed on U.S. exchanges, as all five (3D Systems, Stratasys, ExOne, Arcam, and voxeljet) manufacture printers.

This is no upstart trying to capitalize on a hot trend, as the company was founded back in 1990 by its CEO Wilfried Vancraen. Vancraen's well regarded in the industry, and has wracked up several top industry honors in recent years.

The company's customers are in the medical, automotive, aerospace, consumer products, and design industries, among others. Its business is diversified by region, with Europe, the Americas, and Asia accounting for 55%, 36%, and 9% of revenue, respectively, in 2013. Revenue breakdown by segment last year was as follows:

• Medical: 41%
• Industrial production: 40%
• Software: 20%

The "medical" category includes software for medical applications and production of customized medical implants and guides. So, it's not possible to provide a clean breakdown between just software and 3-D printing production services.

Over the past year, the company has been assisting medical device companies with their designs of orthopedic and cardiovascular devices. While this service seems potentially lucrative, it also opens the company up to an increased level of liability.

Materialise has collaborative agreements with Johnson & Johnson, Zimmer, and other global medical device manufacturers. It prints joint replacement and cranio-maxillo facial guides that these companies distribute under their own brands. Additionally, for certain specialty applications, Materialise provides its own CE-labeled implants and guides directly to the European market. (CE is the European equivalent of the FDA.)

The medical 3-D printing space is attractive because profit margins are typically higher than in other markets. 3D Systems is a leading player in this space, with its health care portfolio accounting for 20% of the company's product revenue in 2013. With its recent purchase of Medical Modeling, 3D Systems further beefed up its health care presence. Arcam is also a significant medical player, as the implant industry is one of its two target markets. The Swedish 3-D printer maker, however, doesn't provide 3-D printing services.

Materialise's software offerings make it unique among the major pure-play publicly traded 3-D printing companies, none of which are involved in this niche. The company's software enables and enhances the functionality of commercial and industrial 3-D printers and 3-D printing operations. It has an installed base of more than 8,000 licenses. Materialise sells its software to 3D Systems, Stratasys, and other 3-D printer manufacturers, which bundle the software with some of their printers, as well as directly to end users, including blue-chip names such as Ford and Boeing.

Materialise's industrial production segment makes both prototypes and production parts. The company has a few service centers in Europe, and believes its Leuven, Belgium, location to be the world's largest single-site 3-D printing service center. Customers include many of the top companies in Europe. It offers a full range of standard 3-D printing technologies. Additionally, the company has 13 Mammoth systems, which use the proprietary stereolithography technology that it developed to print very large parts.

The company also has two newer operations that it groups in its industrial segment: RapidFit and i.materialise. RapidFit uses 3-D printing to provide the automotive market with highly precise measurement and fixturing tools. Materialise recently opened a RapidFit location near Detroit to better serve the U.S. auto market. i.materialise is an online 3-D printing service geared toward designers and consumers.

Financials 
Materialise's revenue rose 16.3% to 68.7 million euros (about $93 million in today's dollars) in 2013. Gross, operating, and net margins were 60.4%, 6.4%, and 4.9%, respectively.

The software segment is the profitability driver, as it generated earnings before interest, taxes, depreciation, and amortization, or EBITDA, of 38.3%, compared with the medical segment's 17.8% and the industrial segment's 3.8%. Average EBITDA for the segments was 16.2%, while companywide EBITDA was 11.1%. The industrial segment's margins have been negatively affected by the two newer operations described above, as neither is yet profitable. Even without these operations included, however, this segment has the lowest margins. So, growing the software and medical segments faster than the industrial segment will be the key to the company's ability to increase profitability.

Materialise vs. competitors
Here's how Materialise ranks relative to several of its peers on some key metrics:

Source: Yahoo! Finance. *Priced at $13 per ADS. Revenue and margin data for the trailing-12-month period for all companies except Materialise; 2013 data used for Materialise.

Takeaway
Materialise, priced at $13 per ADS, is very richly valued from an absolute standpoint. However, from a relative valuation standpoint, it seems appropriately priced. It's in an industry where all the pure plays sport lofty valuations, as there are high expectations for these companies. That's because the 3-D printing industry is projected to grow 32% annually through 2021.

The company appears to have some potential competitive advantages. However, it's much too early to gleam how it will fare once it uses its IPO cash to expand, and is playing in the big leagues. Additionally, investors should keep in mind that its revenue growth was 16.3% last year, which is slow for the 3-D printing space.

As I cautioned before voxeljet went public last fall, 3-D printing stocks are only suitable for those with high risk tolerances, given their high valuations and volatilities.