Xometry, Inc. (NASDAQ:XMTR) recently reported their Q2 earnings, on August 8. The share price jumped by 44% that day, reflecting a high excitement among shareholders, following a reaffirmed 2024 guidance, and strong EPS and revenue results.
In this article, I will cover their recent performance, including their strong Q2 results, while also highlighting my concerns about their profitability, and increased operating expenses.
While I do see long-term potential in Xometry, given the strong revenue, and gross margin growth, my investment style considers a timeframe between 3-24 months. In my view, their performance during this period will depend on reaching the $600 million revenue milestone and achieving positive adjusted EBITDA, at the same time.
Given the high expectations for this milestone and the current rise in operating expenses, I’m not fully convinced about this stock, which is why I maintain a Hold rating.
Company Overview
Xometry is an online, on-demand manufacturing platform that connects buyers with manufacturing suppliers.
Essentially, buyers upload their design specifications (like a CAD model) on Xometry’s online platform and receive an instant quote and a delivery timeline for their parts.
Being an aeronautical engineer myself, I have to admit that I used their platform in the past to estimate the budget required for the parts of one of my sailplane projects. I particularly liked the user experience of their website for its simplicity.
They have two operating segments:
- Marketplace: this is their main segment, involving the revenue generated from connecting buyers and suppliers through their online platform.
- Supplier service: this segment includes revenue from different services offered to suppliers, such as digital advertising, financial services, and productivity tools.
I have included below a table to show the weight of each segment to the 2023 annual revenue, and gross profit.
| Segment | Revenue (2023) (in millions) | Gross Profit (2023) (in millions) | Gross Margin (2023) |
|---|---|---|---|
| Marketplace Revenue | 394.8 | 121.5 | 30.8% |
| Supplier Services | 68.7 | 56.8 | 82.7% |
Author’s compilation from the latest 10-K.
Their smaller segment has a higher gross margin, however, this is normal given that this segment focuses on services, which by their nature, tend to have significantly lower COGS.
Given that they operate in over 70 countries, I have included a table below to show a breakdown of their revenue per geographical area.
| Segment | Revenue 2023 (in millions) | Revenue 2022 (in millions) |
|---|---|---|
| US | 403.3 | 347.7 |
| International | 60.1 | 33.2 |
| Total | 463.4 | 380.9 |
Author’s compilation from the latest 10-K.
Most of their revenue (87%) comes from US-based customers, including engineers, supply chain personnel, and business owners of all sizes.
Recent performance
In their Q2 2024 earnings results, they reported a 19% increase in revenue, YoY, totaling $133 million.
Management mainly attributed this result to their marketplace segment, which saw a 25% YoY increase in revenue.
At first sight, one can see this as a good indication of their success in scaling operations. However, I am concerned about their struggle to achieve profitability.
I tend to not focus too much on profitability if the company is new, or if they are developing a new business segment. However, Xometry has been around since 2013, so I would expect to see some signs of profitability by now, rather than celebrating a smaller adjusted EBITDA loss compared to the same period last year.
However, I will add, as a side note, that they have only been trading in the NASDAQ since June 2021, despite being founded in 2013.
Another challenge that I see is the highly competitive landscape in which they operate. I see the on-demand manufacturing industry as highly fragmented, given that their competitors range from other online platforms, like Proto Labs (PRLB), or Geomiq, to smaller, local machine shops, and 3D printing companies.
However, I am positive about their international expansion plans. In Q2, management reported a 31% YoY increase in revenue for their international segment.
I prefer this segment, given that most of their competitors are focused on the US market, which naturally leads to lower margins due to an oversupply of on-demand manufacturers.
I see good growth potential if they successfully manage to expand their international operations, given that I see more potential for higher margins due to fewer direct competitors than in the US.
Naturally, this expansion plan outside of the US will increase their operating expenses, however, in the long run, once they are established in that region, they have a better opportunity to increase their margins, given the limited supply of on-demand manufacturers.
On the other hand, if operating expenses continue to rise without clear improvements in their international segment, my concerns will deepen.
As an additional note, their operating expenses in Q2 increased by 6% YoY, totaling $55.7 million (non-GAAP). I will dive deeper into this topic in the next section.
Outlook
Management reaffirmed their guidance for FY 2024, expecting an overall revenue growth of 20%, which I believe they will achieve given that in the first half of the year, their marketplace segment achieved an increase close to 25% YoY.
Another target mentioned in their guidance was an increase of 35% in their marketplace gross margin. As a reminder, the gross margin in Q2 for this segment was 33.5%.
This is another goal I believe they will achieve, considering their recent scaling efforts to increase their supplier network.
Regarding profitability, they guided for positive adjusted EBITDA once they reached their $600 million annual revenue milestone.
Given that their TTM annual revenue is $502 million, I believe they will achieve this revenue milestone within the next year, considering their 20% revenue growth rate.
Therefore, I believe that most shareholders are expecting the same, and this was reflected in the 44% jump in share price following the earnings release, as seen below.
Trading View
I did track this stock a few days before Q2 earnings, after noticing a decline in the share price, close to 30% from mid-July, 2024. However, despite seeing the price at a validated support level on the daily chart, I didn’t buy any shares, as I believed it was a speculative bet on their 2024 guidance review.
Given that the company is not profitable yet, I still believe the future of the share price within the next 12–18 months is a bet on whether they will achieve positive adjusted EBITDA, once they reach the $600 million milestone in annual revenue.
Looking at their operating expenses below, I am not fully convinced of their profitability milestone, given that they have been consistently increasing their operational expenses YoY.
Trading View
When comparing EBITDA and net income over the past few years, my concern deepens, as both have been negative since 2019.
Trading View
However, I remain positive about their liquidity, and solvency ratios. Their quick ratio is 4.6, and debt to assets ratio is 0.44, showing that they don’t have any issues in covering their short-term liabilities, and their long-term debt is less than half their total assets.
In regards to the insider buying activity, aside from a $308k buying transaction by Dutt Subir, the Chief Sales Officer, I don’t see any indication that the share price is either too cheap, or too expensive.
Finally, a comparison with one of their biggest competitors, Proto Labs (PRLB) shows that both stocks have been trading sideways over the past year.
Trading View
Conclusion
While I see some potential in Xometry’s growth, particularly with their international expansion and marketplace segment, I remain skeptical as they are still not profitable.
I do believe that Xomerty will reach the $600 million revenue milestone, but I am concerned about the shareholder’s reaction if their adjusted EBITDA is not positive by then. Considering the consistent increase in operating expenses since 2019, I believe the future share price is determined by when they will reach net profitability.
In conclusion, despite strong Q2 results, and reaffirmed FY 2024 guidance, my rating is a Hold until I see clearer signs of sustainable profitability in both their adjusted EBITDA and net income results.
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