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Good News If You Want to Be Richer! This Cathie Wood Stock Is Cheap

By Jason Hawthorne – Oct 6, 2021 at 6:10AM

Key Points

  • Proto Labs’ sales have stagnated in the last two years and margins have contracted.
  • 3D printing could serve as a catalyst. But Cathie Wood isn’t sticking around to find out.
  • The stock is attractively priced if the business can get back to normal.

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A long-term mindset is required for this manufacturing innovator.

Technology has had a profound effect on manufacturing. Analysis firm Oxford Economics says robots will replace up to 20 million jobs in the sector by 2030. But that application of technology is mostly about automating high-volume operations.

When it comes to designing and creating new parts, it's often still a labor-intensive, time-consuming process. That's where Proto Labs (PRLB -1.06%) comes in. The company offers a desirable combination of speed, quality, and price for one-off and low-volume projects.

The stock has been crushed recently. But giving up now could be a costly decision -- one that causes investors to miss out on big gains as the world gets back to normal. Here's why.

A worker in protective gear opening a chamber where 3D printing of metal is happening.

Image source: Getty Images.

A technology whose time hasn't quite come

When the company went public in 2012, the quick turn manufacturer was seen as a play on the future of the manufacturing industry. The injection molding and machining services markets it operated in were estimated to be $50 billion and $35 billion, respectively. Although Proto Labs has steadily grown sales -- compounding revenue at 16% per year over the last decade -- the stock has had wild swings. It is currently about 75% off its all-time high.

Chart showing drop in Proto Labs' price percent off high since 2014.

PRLB data by YCharts

That's because the combination of contracting manufacturing activity in 2019, followed by a global pandemic, crimped margins and led to questions about how big an opportunity the company really has in front of it.

One possible catalyst is 3D printing -- a segment Proto Labs has entered through several acquisitions beginning in 2014. For the first six months of 2021, it made up 15% of sales and was the fastest-growing part of the business.

Segment 1H 2021 Revenue 1H 2019 Revenue Change
Injection molding $114.5 million $110.8 million 3.4
CNC machining $78.3 million $76.8 million 2%
3D printing $35.4 million $29.8 million 19%
Sheet metal $9.9 million $10.5 million (5.3%)
Other $1.0 million $1.6 million (37.3%)
Total revenue $239.2 million $229.4 million 4.3%

Data source: Proto Labs.

ARK believes the opportunity for the technology could grow to $120 billion globally by 2025. That would give the company a lot of room for growth from its current $1.8 billion market capitalization.

Cathie Wood seems to be giving up

If Cathie Wood still believes in 3D printing, she must not think Proto Labs will occupy a prominent place in the industry. Earlier in the pandemic, the stock made up 10% of her ARKQ Autonomous Technology & Robotics ETF (ARKQ -2.32%). It was the fund's second largest holding behind Tesla. Lately, she has been selling relentlessly. The stock now makes up only 1% of the ETF. 

Despite her lack of confidence, the price-to-sales ratio is at a level that has corresponded to great buying opportunities in the past. That said, the shrinking profit margins mean the price-to-free cash flow is still above the levels it bottomed at in the past.

Chart showing Proto Labs' PS ratio and price to free cash flow since 2014.

PRLB PS Ratio data by YCharts

Proto Labs has been a consistent, if not exciting, company over the last decade. It has a 3D printing segment that is sparking some growth and should be in a good position as global manufacturing recovers from the pandemic and supply chain constraints.

The jury is still out on whether the stock will find its way back to all-time highs. But even if it doesn't, it could make a solid investment over the next three to five years.

Jason Hawthorne has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Proto Labs. The Motley Fool has a disclosure policy.

Stocks Mentioned

Proto Labs Stock Quote
Proto Labs
PRLB
$25.30 (-1.06%) $0.27
ARK Autonomous Technology & Robotics ETF Stock Quote
ARK Autonomous Technology & Robotics ETF
ARKQ
$44.06 (-2.32%) $-1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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