It is focused solely on one industry: industrial printing.... It can print in a number of different mediums ... and there's evidence that its printers can be truly disruptive.
When I talked about a "disruptive" force, I was referring to the fact that ExOne started by trying to sell its printers to foundries. Very quickly, the company discovered that foundries weren't interested in the printers because they could eventually displace foundries' place in the supply chain. Instead, ExOne started to pivot its sales toward original equipment manufacturers, or OEMs.
The company also started investing heavily in what it calls its "ExCast" strategy. This allows customers to order a part to be printed by an ExOne machine in a warehouse and delivered to their place of business. Allowing customers to test the printers via ExCast, the thinking goes, will eventually lead to sales of printers to large OEMs.
There's still a chance that ExOne proves to be an excellent investment moving forward. I simply think there are better places for my money right now.
Over the last couple of years, ExOne has continually overpromised and underdelivered. While management has been very clear about the lumpiness of machine sales, conference calls are starting to sound like a broken record. It goes something like this: "We would have met sales forecasts, but a few machine sales had to be pushed to the next quarter."
Of course, this may actually be the case, but it makes me wonder why the company tries to forecast these sales at all. In August of last year, CEO Kent Rockwell stated, "We have 50 machines in the second half of this year that we ... have the ability to make delivery on." That excited a lot of people -- myself included. In the end, however, they only sold 19 machines.
How fragile is the company?
Recently, I finished reading Nassim Taleb's brilliant book Antifragile. After reading it, I became convinced that there were several ways that I could try to measure how fragile a company is. This includes investigating metrics like how much cash and debt a company has, what types of optionality it has for the future, and whether or not executives hold significant portions of the company.
Some of what I found through this lens was encouraging. CEO Kent Rockwell, for instance, owns one-third of the company all by himself. He definitely has skin in the game. Furthermore, the company has $30 million of cash on hand versus just $2 million in long-term debt.
But there were other aspects I considered more troubling. ExOne has been burning through cash quickly. This is mostly in an effort to ramp up its ExCast strategy and other long-term investments. That may be a good move... or it may not. It all depends on how successful these investments are. Here's what the company's free cash flow has looked like over the years.
While that cash pile looks good now, it will only last so long if this continues. And during the company's first quarter, the money-losing continued: negative free cash flow of $6 million. This makes ExOne very fragile.
That, combined with the fact that management already made one huge mistake in not foreseeing the refusal of the machines by foundries, makes me believe there's very little optionality to move in opportunistic directions going forward: Either the company sells more machines, or it won't survive. It can't afford any other outcome.
I could still buy in later
To reiterate, ExOne could end up being a good investment right now. For myself, the risks don't outweigh the rewards. But if the company is able to accelerate machine sales and fulfill its stated potential, I would definitely be willing to reconsider.
Some may argue that this would be silly, as the company's price tag will undoubtedly grow if this happens, but I'm willing to trade a higher likelihood of future success for missing out on a "cheap" stock.