On the surface, Proto Labs (NYSE:PRLB) looks like just an ordinary contract manufacturer. In reality, this is a high-tech software company that can create custom parts much faster than any of its competitors.
On this week's edition of Industry Focus: Technology, host Dylan Lewis and Motley Fool contributor Brian Feroldi discuss why Proto Labs is an industrial stock that tech investors should get to know.
A full transcript follows the video.
This video was recorded on Feb. 22, 2019.
Dylan Lewis: Alright, why don't we kick things off with Proto Labs, admittedly not a company I'm super familiar with. I think it's because I've written it off in the past and looked at it as this industrial manufacturing business that I couldn't quite understand.
Brian Feroldi: Proto Labs is a quick-turn parts manufacturer. If you're a designer and you want to make a physical part out of plastic or metal or something like that, you can hire Proto Labs to make a prototype for you. You give them the design, and in a couple of days or weeks, they will send you back a physical part.
On the surface, you would assume that they were just a low-volume contract manufacturer and prototyping company. That does appear how it looks. However, what makes this company a hidden tech in disguise is that the real secret to Proto Labs' success is that it owns this proprietary software that aids in the design, the quoting, and the pricing of tech parts that are uploaded. For example, if a designer creates a part that they want to have made out of plastic or metal, they upload it to Proto Labs' computers. Proto Labs' software then goes to work to analyze the part, and it actually makes suggestions back to the designer on ways that the part can be manufactured easier and cheaper. It also provides them with a quote within a matter of hours to say, "This is how much we believe we can make this part for."
That stands in stark contrast to most contract manufacturers. When they get a quote, they have to manually go through and look at it and actually decide how much they want to charge for that. That process, just the quoting process with traditional manufacturers, can take weeks. The fact that Proto Labs has automated the process and can get quotes and feedback to designers in a matter of hours gives them an incredible competitive advantage.
Lewis: I love it when the company's name immediately becomes clear based on what they do. Proto Labs, prototypes. Totally makes sense to me, Brian.
Feroldi: Yeah, they try to make it obvious.
Lewis: [laughs] What should folks look for in this business? I'm an outsider, so I don't know it super well. What are some of the key metrics people should be watching?
Feroldi: The traditional ones are worth paying attention to, which is revenue growth, profit growth. This business is scaling nicely. It's growing at about 20% annualized. However, if you dig one level deeper, they report this metric called the number of product developers that are served. This is the number of prototypers and designers that are using their software and uploading and buying products from them. This figure will track pretty consistently with revenue growth over time. This is just like, for a SaaS business, the number of users that are on it. As of the most recent quarter, they had about 46,000 product developers that are uploading designs to them and buying from them. This figure is growing at about 20% per year. This is a key metric for investors to watch.
Lewis: The gist of this company is basically, they have used software to take something that would otherwise be incredibly onerous and tedious to do, might even make scaling something very difficult, and instead turned it into a pretty significant competitive advantage.
Feroldi: Yeah, that's correct. Their real advantage is that their software allows them to be much faster than traditional manufacturers. You have the manufacturers on the high end that do very high-volume production. Then there's a lot of mom-and-pop shops that do very low-volume production for specialized parts. Proto Labs is in the middle of those two. They can offer extremely fast turnaround on parts. That really matters in today's economy where speed to market is everything. When you consider that a lot of parts have to go back and forth multiple times to get iterations right before it can be mass-produced, working with Proto Labs gives designers a huge competitive advantage because it greatly speeds up the design process.