Xometry (XMTR +0.75%) is an online marketplace that connects small-scale manufacturers with people and companies needing custom-made items.
This business is relatively obscure and small right now. But the stock is skyrocketing. As of Dec. 21, Xometry stock is up over 130% since the end of October.
What's truly exciting, however, is that this promising stock has plenty more upside ahead if Xometry's business lives up to its long-term potential. And the company's artificial intelligence (AI) capabilities have a lot to do with it.
Why AI is crucial to Xometry
Xometry is able to stand out from its rivals because it can offer instant pricing on custom-made parts. Most investors probably don't understand why this is so huge. So allow me to elaborate.
NASDAQ: XMTR
Key Data Points
If a person or business were to take a custom order to a machine shop or other manufacturer, it would take time for the shop to come up with a bid. Therefore, there's a time element here.
Xometry's AI can solve this problem. When users navigate to the platform, the AI software reviews the custom order request and provides an instant bid. Lead times get drastically reduced with this model. And unless a small shop has AI software (it most likely doesn't), no one can match Xometry's speed.
The AI works for customers, but this system needs to work for Xometry as well. Here's what I mean: Xometry doesn't fulfill the orders itself. It merely prices the jobs and then outsources production to independent third parties. And this is where a potential problem arises.
Xometry sells the jobs to small shops at a lower price than what it bid. The difference between what it charges buyers and what it pays the shops is its gross profit.
If the AI prices jobs too low to begin with, shops won't want to take the jobs once Xometry puts them up for grabs. To incentivize the third-party manufacturers to take the jobs, Xometry would have to increase the payout, hurting its own gross profit.
It could avoid the problem by pricing jobs high to the buyers to begin with. But if the AI prices jobs too high, users won't want to use the platform, and the company's revenue growth will suffer. Therefore, Xometry is trying to strike a delicate balance on pricing -- and it's turned to AI to do it.
Xometry's AI seems to be performing admirably right now. The chart shows strong revenue growth (though it's slowed in recent quarters) and meaningful gross margin improvement. Interpretation: The AI is pricing jobs quickly and appropriately.
XMTR Revenue (Quarterly YoY Growth) data by YCharts
The long-term upside for Xometry
Xometry's platform only has 52,000 active buyers, which represents just a fraction of the global potential user base. This is partly due to how new it is -- it was only founded 10 years ago. Therefore, there's plenty of growth opportunity from winning new buyers.
Within its existing buyer base, there's growth opportunity for Xometry as well. Management talks about the importance of its top 200 customers. Over time, these large enterprises can outsource more of their work to Xometry's platform as it proves to be a reliable partner.
Xometry's management estimates its addressable market to be about $2.4 trillion, compared with its trailing-12-month revenue of $433 million. Take the addressable market number with a grain of salt -- researchers tend to be overoptimistic in general. But even if the market were only 10% of its estimated size ($240 billion), it would still represent a mind-blowing opportunity for Xometry.
Should investors buy Xometry stock today?
The future looks bright for Xometry, but it still has a lot to prove. Remember, the platform is only 10 years old, and it might fail to take the next step toward widespread platform adoption. In short, it's a promising opportunity, but not necessarily a no-brainer -- few things in life are.
Investors will want to make sure they buy Xometry stock at a bargain valuation to compensate for the potential riskiness. And one thing's for sure: Xometry stock was a lot cheaper before it rallied more than 130% in under two months.
The speed of Xometry's gains are suspect, considering there wasn't any consequential news during this time -- recent gains seem to be fueled by short-term traders. Therefore, I wouldn't be surprised if the stock pulled back in the weeks and months to come. Patient investors might be able to wait for a slightly better price.
That said, Xometry stock is still a promising business, and it looks poised for more gains in 2024. So investors who like this business might not want to wait too long before adding it to their portfolios.
