Velo3D (VLD -3.65%) is a 3D printing company that manufactures high-end parts for spaceships and rocket engines among a few other things. The company is tiny, with a $350 million market cap, and growing quickly (more than 900% revenue growth in its most recent quarter).
Before you get too excited, the company had only $38 million in revenue during the past 12 months. So it's very, very early. In fact, Velo3D burned $37 million in cash in Q1, and it's down to $186 million. So like a lot of start-ups, Velo3D might die an early death (particularly if the economy lurches into a recession).
Nonetheless, I'm bullish on this little company, and I've started buying shares. So why do I want to own this tiny stock?
Image source: SpaceX.
SpaceX is a strategic investor
SpaceX -- maybe the most exciting private company out there right now -- once tried to acquire Velo3D. Chief Executive Officer Benny Buller rebuffed the overture -- the company wants to stay private. So Elon Musk and his team at SpaceX decided to become a strategic investor instead.
SpaceX uses Velo3D's Sapphire machines to create parts for its Raptor engines. SpaceX started off buying one Sapphire printer in 2018, making it Velo3D's first customer. That initial order rapidly increased to 22 orders by 2021. SpaceX even paid for future versions of the device that didn't exist at the time of the contract. So when Velo3D's next-generation printer, the Sapphire XC, first hit the market, SpaceX got them all.
That unit costs about $250,000. We don't know the specifics of the SpaceX contract with Velo3D, but the company definitely got a cheaper rate -- so much so that in Q1, Velo3D reported a gross margin of 0%, in large part because the eight machines that shipped that quarter all went to SpaceX (aka "the launch customer"). As Buller said on the Q1 conference call, "the pricing point for the launch customer was significantly lower, as they bought the system before there was a system."
Of course, SpaceX is a huge company. Founded by Elon Musk, the richest man in the world, SpaceX is privately valued at about $127 billion based on its most recent round of fundraising. So the money that it's invested in Velo3D and its 3D printers is relatively tiny.
Why was SpaceX interested in acquiring the company? The head of additive manufacturing (AM) at SpaceX opined that, "Velo3D is at least five years ahead of any competition."
A breakthrough technology
Companies like SpaceX are interested in AM devices (aka 3D printers). If you have a complex device made up of dozens of parts, it would certainly be a lot easier if you could reduce that part to one.
The problem with traditional AM solutions is that you often can't produce the required designs -- you have to redesign the part so that the printer can make it. But even worse, you have performance degradation over time. So you would have to add metal supports to the AM part to avoid breakage.
Velo3D offers support-free AM. You can reproduce legacy parts without the need for redesign, and they won't fall apart. Velo3D's machines create parts from nickel, titanium, aluminum, and copper. But the real breakthrough is that no supports are needed.
The company's first device, the Sapphire, is the basic printer. But what will really drive sales is the next-generation device, the Sapphire XC. That's the one SpaceX bought before it existed. The Sapphire XC is a larger machine designed to scale the mass production of parts. You can produce five times as many parts as the original Sapphire, at a much cheaper price point.
Expanding out the customer base
I'm a big fan of SpaceX and Elon Musk's vision for his company. Last year, SpaceX signed a $2.9 billion contract with NASA to put astronauts back on the moon by 2025. To my mind, SpaceX is a major customer win for Velo3D. And I see it as a validation of the technology.
But I also know that suppliers to companies like Apple often seem to get the short end of the stick. So while the SpaceX relationship is exciting, it might not be as rewarding as we investors might like.
On the other hand, Velo3D is dramatically increasing its customer list. Other customers include:
- Lam Research
- Lockheed Martin
- Honeywell
- Raytheon
- Kratos
- Honda
- Schlumberger
- Mitsubishi
- Siemens
- Jabil
- ConocoPhillips
Management expects to add as many 24 new customers in 2022. Buller estimates that his company will have $89 million in sales in 2022 (an annual growth rate of 225%). Some customers are opting to lease the machines and pay a fee per usage.
Risky, but huge potential
Barry Sternlicht brought Velo3D public via a SPAC (special purpose acquisition company) merger last year. Sternlicht is the billionaire co-founder of Starwood Capital. He's highly respected in the industry and has been a notable critic of some of the wild deals in the SPAC world.
Velo3D is a risky investment and not for the faint of heart. The stock has been killed since the company came public.
It's now officially super cheap. There's a legitimate risk of a company like this going belly up. On the other hand, it looks to me like Velo3D might have solved the problems that have prevented mass adaption of AM. If that's the case, the stock will be a huge winner.
My suggestion: If you are buying, start off with a small initial investment, under 1% of assets.
