Shares of Sweden's Arcam (NASDAQOTH: AMAVF) have plummeted 40% in 2014. Let's look at the reasons for the falling stock price of this small industrial metals-focused 3D printing company -- and what investors should key in on going forward.
Poor absolute performance, decent relative performance
Arcam's drooping stock has as much -- or perhaps more -- to do with its industry group as its financial results. 3D printing stocks in general have been getting clobbered this year:
These companies had been on fire for several years prior to 2014. They pulled back primarily because the stocks' valuations got ahead of their fundamentals, which is a common occurrence for red-hot stocks. Despite 2014's drop so far, Arcam's stock is still up 701% from when it started trading on the Nasdaq in August 2012.
While there's no guarantee how the existing players will do going forward, the industry's long-term prospects remain bright. Industry expert Wohlers Associates projects that 3D printing industry revenue will increase from $3.07 billion in 2013 to more than $21 billion in 2020; that's more than a 31% compound annual growth rate.
Arcam's first-half 2014 results
Arcam's first-half 2014 results were decent, though far from exceptional for a company occupying a fast-growing space. During this period, the company sold 11 3D printers that use its proprietary electron beam melting, or EBM, technology -- the same number it sold in the first half of 2013. For context, the company sold 25 3D printers in 2013 and 13 in 2012. However, CEO Magnus Rene noted during the last conference call that he expects the second half of this year to be stronger than the first.
Beyond looking at just sales, it's important to consider actual orders, because various factors can affect when an order is delivered and, hence, booked as a sale. Arcam received 16 orders for EBM systems in the first half of this year, versus 13 in the first half of 2013. Order backlog at the end of the first half was 16 (and 17 when Arcam reported its second-quarter results), versus 12 at the end of the same period last year. Both these sets of figures indicate steady, but not robust, demand.
As for the financials, revenue for the first half of 2014 increased by 21% to 111 million Swedish krona, or about $16.6 million. Net income dropped 49% to 3.9 million SEK, or about $583,000, while earnings per share decreased 56% to 0.21 SEK, or about $0.03. However, excluding the nonrecurring costs of 6 million SEK associated with the acquisition of metal powder producer AP&C, Arcam's net income rose 30% to 9.9 million SEK, or about $1.5 million, while EPS increased 12.5% to 0.54 SEK, or about $0.08.
Arcam's profit margin was 3.5% on a generally accepted accounting principles basis, and 8.9% if excluding the nonrecurring cost associated with the acquisition. These are solid profit margins for a small 3D printing company, as none of the other smaller players (ExOne, voxeljet, and Materialise) are profitable.
Granted, revenue growth of 21% is weak for the fast-growing 3D printing industry. However, there were good reasons that the number of 3D printers sold in the first half only matched the number sold in the same period last year. As Rene stated during the last conference call:
There are actually three reasons behind the somewhat slow shipments. ... We have a lot of customers in China now and some of those customers that should have taken delivery in the second quarter couldn't because of customs formality reasons that are now sorted out, but weren't sorted out by the end of June. The second is planning. We had an unexpectedly strong order intake for the A2X system and we produce on forecast and we didn't forecast that strong of sales, which means that we have A2X orders that we could have shipped, but we couldn't because we hadn't built those machines. And finally ... [w]e decided to delay the shipments of the Q20 systems for a few weeks to finalize quality assurance before we ship the first systems out.
These factors didn't result in any loss of sales, simply a shifting of sales to the future. Arcam took a hit in the second quarter, and hence first half, on a year-over-year comparison basis. However, this scenario should result in a positive in the second half of the year. Arcam's a small company that sells relatively few pricey 3D printers. Thus, even one or two sales shifting from one half to the next can make a considerable difference in its results. That's why it's best for investors to look at Arcam through a wider time lens.
Looking forward
Several catalysts could help power Arcam's future results and stock price.
First, Arcam is widely considered to be one of several companies in the running for multiple 3D printer orders from General Electric, which plans to use 3D printing to produce fuel nozzles for its Leap jet engine. In July, Greg Morris, GE general manager of additive technologies, told Reuters, "We're in the final stages of selecting the equipment manufacturers."
Second, early indications are that Arcam's new Q20 3D printer is garnering solid interest from the aerospace industry. Arcam has received nine orders since the Q20 was launched in December. The Q20 is a high-end system that was specifically designed for series production of a wide range of aerospace components, such as turbine blades and structural airframe components.
Lastly, Arcam now has additional revenue sources. The company completed the acquisition of AP&C in February. In addition to providing a new revenue source, the acquisition should help Arcam reduce the costs of obtaining the metal powder it sells to customers. Also, earlier this month, Arcam exercised its option to buy strategic partner DiSanto Technology, a Connecticut-based contract manufacturer of medical implants.
Foolish takeaway
Arcam's stock price drop in 2014 can largely be attributed to a deflation of the sky-high valuations of the 3D printing stocks in general, as their stock prices raced well ahead of their fundamentals. However, Arcam's only so-so results in the first half of the year have also surely contributed to the plummeting value of its shares.
Positively, Arcam is profitable, occupies an attractive niche, and has several potential catalysts for growth: its new Q20 system, possible orders from GE, its AP&C metal powders business, and its DiSanto Technology subsidiary.
That said, because Arcam is a one-technology company, investors need to remain especially focused on order intake numbers. A slowing in orders received could signal that one or both of the company's two markets (orthopedic implants and aerospace) are favoring other metal 3D printing technologies over Arcam's EBM technology.
