Should you invest with SpaceX in this micro-cap?
Bike3D (VLD 22.22%) is a 3D printing company that manufactures high-end parts for spaceships and rocket engines, among other things. The company is tiny, with a market cap of $350 million and growing rapidly (over 900% revenue growth in its last quarter).
Before you get too excited, the company only made $38 million in revenue over the past 12 months. So it’s very, very early. In fact, Velo3D burned through $37 million in cash in the first quarter, and it fell to $186 million. So, like many start-ups, Velo3D could die prematurely (especially if the economy goes into a recession).
Nevertheless, I am optimistic for this small company and have started buying shares. So why do I want to own this small stock?
SpaceX is a strategic investor
SpaceX – perhaps the most exciting private company around – has already attempted to acquire Velo3D. CEO Benny Buller pushed back the opening — 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 began purchasing a Sapphire printer in 2018, making it Velo3D’s first customer. This initial order quickly grew to 22 orders by 2021. SpaceX even paid for future versions of the device that did not exist at the time of the contract. So when Velo3D’s next-gen printer, the Sapphire XC, first hit the market, SpaceX got them all.
This unit costs around $250,000. We don’t know the details of SpaceX’s contract with Velo3D, but the company definitely got a cheaper rate — so much so that in the first quarter, Velo3D reported a 0% gross margin, largely because the eight machines who shipped that quarter all went to SpaceX (aka “the launch customer”). As Buller said on the Q1 conference call, “the price for the launch customer was significantly lower because they bought the system before there was a system.”
Of course, SpaceX is a huge company. Founded by Elon Musk, the world’s richest man, SpaceX is privately valued at around $127 billion based on its latest fundraising. Thus, the money invested in Velo3D and its 3D printers is relatively small.
Why was SpaceX interested in acquiring the company? The Head of Additive Manufacturing (AM) at SpaceX said “Velo3D is at least five years ahead of any competition.”
A disruptive 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 much easier to reduce that part to just one.
The problem with traditional AM solutions is that you often can’t produce the required designs – you have to redesign the part so the printer can make it. But even worse, you have performance degradation over time. It would therefore be necessary to add metal supports on the AM part to prevent breakage.
Velo3D offers an AM without support. You can replicate legacy parts without needing to redesign them, and they won’t fall apart. Velo3D’s machines create nickel, titanium, aluminum and copper parts. But the real breakthrough is that no supports are needed.
The company’s first device, the Sapphire, is the base printer. But what will really drive sales is the next-gen device, the Sapphire XC. It’s the one SpaceX bought before it existed. The Sapphire XC is a larger machine designed to scale up mass production of parts. You can produce five times more parts than the original Sapphire, at a much cheaper price.
Expand customer base
I’m a huge 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. In my opinion, SpaceX is a major customer 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 have the short end of the stick. So while the SpaceX relationship is exciting, it may not be as rewarding as we investors would like.
On the other hand, Velo3D is significantly increasing its client list. Other customers include:
- Lockheed Martin
- Conoco Phillips
Management expects to add up to 24 new customers in 2022. Buller estimates that his company will achieve $89 million in revenue in 2022 (an annual growth rate of 225%). Some customers choose to rent the machines and pay a fee per use.
Risky, but huge potential
Barry Sternlicht took Velo3D public through a SPAC (Special Purpose Acquisition Company) merger last year. Sternlicht is the billionaire co-founder of Starwood Capital. He is highly respected in the industry and has been a notable critic of some of the craziest cases in the SPAC world.
Velo3D is a risky investment and not for the faint-hearted. The stock has been killed since the company went public.
It’s now officially super cheap. There is a legitimate risk that a company like this will go bankrupt. On the other hand, it seems to me that Velo3D could have solved the problems that prevented the massive adaptation of the AM. If so, the stock will be a big winner.
My advice: If you buy, start with a small initial investment, less than 1% of the asset.
Taylor Carmichael holds positions at Apple and Velo3D, Inc. The Motley Fool holds positions and recommends Apple and Lam Research. The Motley Fool recommends Lockheed Martin and Velo3D, Inc. and recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.