Although shares of ExOne (NASDAQ:XONE) have lost about 60% of their value since the company's IPO, there's no rule in investing that says they can't fall further. Since becoming a public company, ExOne has endured a myriad of execution issues that have resulted in the company missing its own and Wall Street's quarterly earnings expectations on a fairly regular basis.
With over 28% of ExOne's shares currently being sold short, it's clear investors aren't particularly upbeat about the emerging growth company's longer-term prospects. Unfortunately, if the following three scenarios come to pass, ExOne's growth prospects could weaken further.
1. Big customers pump the brakes
In the first quarter, roughly 25% of ExOne's total revenue came from its five largest customers, which is substantial for an emerging growth company that sells six- to seven-figure 3D printers in low volumes. An order delay or cancellation from a large customer could significantly impact the company's full-year results. For reference, ExOne sold 28 3D printers in 2014, which translated to nearly $22.8 million in revenue, or about 52% of its total revenue.
The other issue with big customers is that there's no guarantee they'll stay large hardware customers once they reach their desired capacity for ExOne's 3D printers. In other words, in future periods, ExOne might have to find large replacement customers to fill any revenue gaps on the hardware side of the business.
2. Binder jetting fails to gain traction
Since ExOne's inception in 2003, the company has sold approximately 200 of its specialty 3D printers -- peanuts amid the over 79,000 3D printers sold across the industrial space between 1988 and 2014, according to Terry Wohlers of Wohlers Associates. This small installed base suggests that ExOne's binder jetting technology isn't as widely accepted as leading 3D printing technologies such as fused deposition modeling, selective laser sintering, and stereolithography.
To drive demand, ExOne plans to tap into its network of eight production service centers, or PSCs, strategically placed throughout the world near large industrial manufacturing hubs. The centers allow prospective customers to get acquainted with ExOne's product portfolio and to have 3D parts printed on their behalf. The idea is that if ExOne can thrill a customer with the quality of the parts its printers can produce, it could lead to future 3D printer sales.
However, in the broader context of ExOne's market share relative to the industry, this grass-roots approach will likely take years to play out, and any sign of struggle on this front could make investors lose more faith in the company's long-term potential.
3. Cash runs dry
ExOne ended the first quarter with about $30 million in cash, which is significantly down from the over $110 million peak it raised between its IPO and secondary offering.
To be fair, ExOne considered 2014 a year of investment, and spent its cash on building PSCs, acquisitions, and funding its day-to-day operations.
Management asserts the company will end the year with $25 million to $30 million in cash, which is hard to imagine, considering it burned through $6.1 million in the first quarter. ExOne has a number of options to meet this goal, including spending less cash, improving cash flow, and raising additional capital. It's also worth noting that ExOne expects the second half of 2015 will represent 70% of its full-year sales.
However, should ExOne fall short on this promise or become strapped for cash, it isn't likely to sit well with already-frustrated investors.
Putting it all together
At this stage of ExOne's existence, the question remains whether management can build an organization that can tap into what CEO Kent Rockwell believes could be a "multibillion-dollar market opportunity" for industrial 3D printing. Add in the company's history of disappointment, and it seems more important than ever to understand the major risks that could derail ExOne's long-term prospects.
Steve Heller owns shares of ExOne. The Motley Fool recommends and owns shares of ExOne. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.