Description

[ Idea for PAs because it’s a 15mm market cap ]

Shapeways is an unprofitable net-net that went public via SPAC in 2021 and is down from $80 to $2. This past quarter the company started to reduce cash burn and recently announced they’re looking for strategic alternatives. The business was started in 2007 in the Netherlands as a provider of 3D-printed prototypes but eventually became U.S.-centric and today has a much more sophisticated offering. They’ve internally created a software platform to provide an end-to-end digital manufacturing solution with minimal human intervention (from the moment clients upload their design until the moment the result is placed in a box for shipping). New entrants cannot reproduce this platform easily. On top of that, two years ago they made that platform publicly available for other manufacturers use for a fee, thus creating a separate business layer and turning that software into an operating system for all 3D printers. Also, the company operates a marketplace where 3D manufacturers can respond to RFQs by designers. The company has 200 employees and lots of big investors that still have lots of shares, including:

5% Greg Kress, CEO (mostly options)

2% Alberto Recchi, CFO

14% Lux Capital (Josh Wolfe sits on the board)

11% Andreessen Horowitz

7% INKEF (Dutch VC firm)

The kind of BOD they have + the sophisticated nature of the business means the business is valuable and they won’t want this to be a chapter 11. It therefore makes perfect sense they’re looking for strategic alternatives now that cash is depleting. These days the business is starting to scale significantly and ensuring continuity by being taken over is very doable. This isn’t a situation with messy liabilities. I think they have at least 3 potential types of potential suitors: a peer in the 3D space, a large-cap industrial interested in getting a foothold in digital/additive manufacturing and maybe even a software company. A company like HP would be ideal in my view.

Net current assets were $18mm on September 30^th. If they started looking for buyers in October and it’ll take 6 months to sell, on the day of the deal there should be approximately $9-10mm left + the value of their business (run-rate revenue ~$40mm) so any semi-respectable multiple gets you a nice return from today’s market cap of $15mm. Also, they have NOLs.

Business Description

SHPW’s business consists of 3 parts. The majority of revenue has been generated from manufacturing end products until now. Then they have the two smaller but rapidly-growing high-margin divisions: subscriptions to their digital manufacturing platform and commissions for users of their marketplace. Here are the details:

Manufacturing

Shapeways carries out additive manufacturing of 3D models they receive; their facilities are in Michigan and in the Netherlands. They have about 40 supply chain partners globally who provide incremental capacity, new materials and manufacturing technologies. Approximately 36% of revenue in 2022 were orders fulfilled through these partners.

The company uses their end-to-end digital platform that automates their process. Each of the following steps can be done without human intervention: the order system; the analysis and correction of uploaded files; planning of where the manufacturing will take place, what suppliers are involved and what materials are needed; preparation of machines; production, monitoring and logging of results; assembly/inspection and preparation for delivery. The combination of that platform + the human intervention (when needed) is superior and more flexible compared to what other companies offer. Here are the main competitive advantages:

- Their in-house experts assist clients with file optimization, file correction, choice of materials and prototyping. Since the team is large and the company deals with many materials, more clients can get more help/insights. Because they are serving a broad range of industries, their expertise is growing more and more rapidly.

- Production capabilities are more interesting due to the wide array of possibilities: 12 hardware technologies and more than 120 materials and finishes. Furthermore, having all these possibilities has led them to design their software to be very generalized and not depend on any specific providers of materials or on any manufacturing technology. They will therefore adapt more easily to new providers, technologies and materials in the future and that will widen their moat further.

- Customers can track production in real time, looking things up by machine, material, operator, and process.

- The company offers performance and fit testing, quality checks, assembly for finished parts and custom-branded packing.

- They often drop-ship to the end user of the part. The reason they can do that is because of the success rate of the manufacturing (i.e.: the designers in these cases don’t even feel the need to inspect the part prior to their customer seeing it).

In summary, scale provides SHPW with the ability to offer more and create a competitive advantage, which yields more clients, more expertise, which then leads to more scale, an even wider moat etc’.

Software (Otto)

At the end of 2021, SHPW launched Otto, which is simply a cloud version of the above-described internal end-to-end software platform. Other manufacturers can now use the platform for a fee. This is attractive to these companies because they can shift to digital manufacturing gradually by trying it first and scaling up if desired, and they don’t need to create any expensive in-house software of their own to digitally manufacture. SHPW is thus able to rise above other manufacturers and become the software base that everyone is built on. Currently over 500 manufacturers use Otto, ranging from people who work alone to enterprise clients. Otto represents about 10% of revenues and it could grow 50-100% over the coming year. The rest of the business has not been growing that much, so anyone looking at past data in this stock will not notice this division.

Marketplace

Shapeways has an online marketplace where manufacturers can sell products for customers. The company receives a 3.5% fee and handles a lot of the back-end process.

Recent Developments and Valuation

- At the beginning of 2023 they were aiming for a low single-digit quarterly cash burn by the end of the year.

- Software sales grew in 2023 which very helpful because it’s high-margin (will double in 2023 vs. 2022)

- They signed several multi-year manufacturing contracts with enterprise customers also.

- In each of the first three quarters they burned about $8mm, thus failing to reach their objective of low-single-digit cash burn. On September 30^th they had $28mm left in current assets vs $10mm of total liabilities i.e. net current assets of $18mm.

- In their Q3 press release they announced a plan to cut 15% of employees which should save them $0.6mm quarterly; they also said they’ll cut other outflows. They guided $9.3mm to $10mm for the Q4 top line and a lot of that sequential growth is high-margin software sales which should keep growing QoQ. In my estimation cash burn can be reduced to about $5mm in Q4, then $4mm in Q1 and further reduced afterwards. This would imply that net current assets is around $15mm today.

They appear to be serious about selling. A year seems too long to sell a business like this, especially given their Rolodex, so 6 months is probably a reasonable time frame. If we assume they started looking in October, it would mean a sale happens in February when there should be approximately $9-10mm left in net current assets. Still, in the table below I give different scenarios of how much is left when they sell. Run-rate revenue is ~$40mm of which 10% is software revenue so I also give scenarios with different multiples for software vs. non-software. Note there are 500k options outstanding at a strike of ~$4/share so in cells where the sale price is high enough, I diluted the number of shares


Scenarios for Sale of the Company

So the biggest factor affecting the return here is how much they get for their manufacturing business. The second biggest is a tie between how much they get for the software portion and how much net current assets are left on the balance sheet. The quality and future potential of the software business is not going to affect valuation as much as it will affect whether or not a deal gets done, and in my view as explained above I think a deal does get done because of how good it is. Essentially, someone will buy this thing because they see the potential of the software portion.

In order for this to be a zero, no buyer would have to be found and no cash preservation strategy would have to be good enough. I think cash might keep burning but I don't think they'll have issues finding a buyer. I suppose since a buyer knows there's a cash burn situation, SHPW will get a low-ball offer. But if there are competing bids then SHPW should fetch something more respectable. Furthermore, whoever buys this can make the option holders happy (mostly the CEO) especially since the strike prices are mostly within reach at $4. So personally if I had to guess, I'd predict something like $10mm in net current assets in a sale in Feb-March, 3x for software, 0.5x for non-software, that gets you to $4.92.

Catalyst

Sale of the company