Xometry (XTMR)

Intro to Xometry – A quick reminder on Why We Do What We Do and Why, Together, We Win:

You do not own some nebulous financial asset. What you own is a portion of ten businesses that are solving very real and sizable problems in unique ways and getting better, stronger and more valuable as they do that.

Anyone who has ever spoken with us knows how much we enjoy our research process. Other firms often have a top-down approach in which smart people in tall buildings come up with some thesis and employ analysts to go out and find supporting material and ways to invest or speculate in a manner consistent with that thesis. This approach can make for convincing copy, but, to us, it drives a difficult and dangerous investment process. Our approach is the opposite. We always want to maintain an open mind, and we are unwilling to risk our capital based on our simply being smarter than others as we interpret readily available information. Instead, from the second floor of a building we go out and learn from the people in the real economy who know what is actually going to happen, at least as relates to what products or services they are going to buy or not buy and why, where the talent in their industry is going, what problems remain unsolved, and what the risks are for the various players in the market.

We do the pick and shovel detective work of gathering all the necessary pieces of the mosaic and then arrange and rearrange the pieces until a clear image emerges. It is a lot of work, but “You have to carry a big basket to bring something home.”¹ It is great fun learning all day, and it is exciting and rewarding when the pieces come together into a logical design. Our skill is not some innate ability to predict the future but rather lies in knowing what questions to ask, recognizing patterns and synthesizing.

To be clear, while we talk about fun, we do this to win. And we think the “game” we play is a much easier game to win than the “I’m the smartest guy in the room” game. We also put ourselves in a highly advantaged position to win since we are, by design, capacity-constrained, highly concentrated and only available to true long-term oriented investors. So, together, we are among the very few investors who can truly minimize risk and maximize growth of our capital by doing in-depth, long-term oriented, primary research on less well-known and less liquid durable growth companies that have strong positions today and nearly inexhaustible room to grow long into the future.

As a case in point, Xometry was not our primary target when we started sniffing around its industry. We were working on a competitor of sorts whose stock price and expectations had come down very significantly over the last two years. We knew that that company enjoyed a solid reputation in its industry and still possessed only a small part of a large market that theoretically could be in reach. Perhaps there was an opportunity for a reacceleration which could drive the stock much higher.

But customer after customer kept saying of the initial target, “they’re fine, and there’s a role for them, but the world is moving quickly in the direction of this other guy who has a totally different offering that makes our lives so much easier and solves a big problem for us. That’s who we’re moving to, and that’s who we are going to rely on in much larger ways going forward.” Our process allowed us to avoid the dreaded value trap landmine and uncover a growth company gem instead.

Xometry (XMTR):

Any company’s opportunity and ultimately its value is a function of the size of the problem it is solving and the enduring uniqueness of their solution. With the creation of its on-demand digital marketplace for manufacturing, Xometry solves three enormous and thorny problems in genuinely unique ways that will only grow more compelling as scale and network effects kick in.

Problem 1:
There are more than 625,000 manufacturing shops in the U.S. alone, and 75% of them have 20 or fewer employees and almost no cost-effective way to tap into demand outside of their local market. They also typically lack the proper technology to manage their business, relying instead on spreadsheets and clipboards. They also have little access to convenient financing tools to alleviate significant working capital needs.

Problem 2:
Everyday tens of millions of people globally use AutoCAD and other computer aided design (“CAD”) packages to design new things or components of things, but they have no precise knowledge of what their new thing will cost to manufacture since it has, by definition, never been built before.

Problem 3:
Most consumer services have been digitalized creating vast empires along the way for the likes of Amazon, Google, and Apple. But manufacturing has yet to be digitalized. When you design something, figuring out who has the expertise and capacity at that moment to build it to your specifications and on your timeline is a manual, time-consuming process that fundamentally fails to discover new and better sources of capacity and, hence, best available pricing.

1. Creating and qualifying a curated network of suppliers across all relevant manufacturing methodologies,
2. Creating the first real-time pricing tool for newly designed products, and
3. Creating the first large scale digital marketplace where customers can instantaneously purchase a desired quantity of a newly designed product at specified tolerance levels, turnaround time, and with all necessary certifications across all major manufacturing modalities.

The Supplier Network

Xometry currently has more than 2,000 active suppliers in its network, mostly based in the United States although the build out of the network is underway in Europe and Asia. The appeal to join the network for a manufacturer is obvious. Once you are vetted and demonstrate quality and reliability through test runs you have access to orders you would never otherwise see. Xometry offers each new order it receives to a subset of their network based on prior performance and qualifications. The marketplace is voluntary to suppliers. If they are busy and do not need work, they can ignore it and someone else will jump at those orders. The first supplier to accept the specifications and pricing gets the order and gets to work. The pricing offered to suppliers is the price Xometry quoted to the purchaser less Xometry’s take-rate which can vary but averages close to 25% and continues to trend higher as Xometry leverages AI/machine learning and expands their supplier network. Sorry for the buzzwords, but it is a real and powerful application of the technology. As the owner of the largest, by far, relevant data set, Xometry is in a privileged position to apply AI/machine learning to get better at its initial pricing to customers and estimating their cost of production.

The beauty of these orders to a supplier lies in the fact that most manufacturing is very much a fixed cost business. The cost is in the equipment, and labor is largely fixed. If you have idle equipment, it makes sense to take any order that offers any substantial revenue beyond the cost of production. The marketplace is voluntary to suppliers. If they are busy and do not need work, they can ignore it and someone else will jump at those orders. Importantly, orders from Xometry have no sales and marketing expense. There are no salespeople to pay. We have spoken to manufacturers who have launched businesses around Xometry. They bought the equipment and never hired a salesperson because they knew they could just pick their orders off the Xometry job board. Other suppliers indicated that this order flow will give them the confidence to buy more equipment and grow their business.

Xometry also helps their suppliers in other ways. They offer fast, competitively priced supplies and raw materials, and utilizing their data and positioning they offer accelerated payment terms for a fee against any orders in process. Through their recently acquired Thomasnet division they offer manufacturers complete digital marketing services, e-commerce solutions, analytics, and the ability to advertise in Thomasnet, the largest industrial directory with 1.3 million registered users searching for suppliers each month.

Xometry recently acquired FactoryFour, a powerful but easy to use manufacturing execution system. FactoryFour software replaces clipboards and spreadsheets and helps manufacturers plan their capacity, enhance process control, and optimize order execution. Xometry has integrated Thomasnet and the Xometry marketplace into FactoryFour and will shortly release the combined offering on a freemium basis to any manufacturer. With these integrations, FactoryFour will make accepting and managing Xometry orders extremely easy for suppliers and further embed Xometry in their workflow.

Providing all these solutions to manufacturers and embedding them in their workflow strategically ensures that Xometry will be able to grow its supplier base as needed to meet the ever-increasing demand generated in its digital manufacturing marketplace. And as the provider of the leading tools for revenue generation, operational control, and digital marketing, Xometry is positioned as both the Shopify and the Google for the enormous and fragmented universe of small and mid-sized manufacturers.

The Pricing Engine

The ability to offer buyers an instant price for never produced items that only exist in CAD files is the lynchpin of the entire Xometry offering. Without instant pricing, Xometry would just be an interesting bulletin board and the buying process would be challenged by significant friction. Pricing a pack of Duracell batteries is simple for Amazon or Walgreens, while pricing something that doesn’t exist is complex and error prone, particularly for items requiring tight tolerances, short timelines, and for demanding applications like aerospace and defense.

By being a pioneer with this vision, Xometry has built the widest and deepest database of custom manufactured items and their cost, across virtually every manufacturing modality. The head start from millions of datapoints, the years of focused R&D, tactical acquisitions to complete the offering, and the losses accumulated building the brand, awareness and all other aspects of the business have cemented their preeminence. It would seem very difficult to make the business case to try to copy Xometry with a manufacturing pricing model, especially in today’s business and stock market climate. You’d be begging for losses, and how would you even do it without an established supplier base who actively engages with you? And how would you refine the model without any real-world orders? And how would you ever catch up to Xometry who will keep getting sharper with better tools for this focus and an ever-growing supplier base?

The Xometry pricing engine is so useful and unique that many engineers told us that the term “Xometry it” has come to mean get pricing in the engineering/design world. Even if you are not ready to buy but want to know the cost and manufacturability, just download the file to Xometry and learn the cost, a process which embeds Xometry as a useful part of the design process. Through Xometry you can quickly learn what would happen to cost if you tweaked the design, the material, the tolerances, or changed the manufacturing modality.

In solving this pricing challenge, Xometry is effectively the New York Stock Exchange of custom manufacturing.

The Digital Marketplace for Custom Manufacturing

Even if you are suspicious of Amazon’s power, root for others to somehow surpass them, and actively dislike Jeff Bezos when he wears cowboy hats into space, you have to admire what Amazon has done to make it super easy for consumers to buy everything they could possibly want. It is the bar by which all other shopping experiences are judged. Nothing approaching that experience existed in custom manufacturing prior to Xometry. Companies with narrow offerings especially in easy to execute modalities such as 3D printing could offer a reasonably good experience, but that is akin to a 1997 Amazon experience when they only sold books. Such limited offerings lack any clear savings since the nature of the item makes price comparison difficult and by being captive to that one company, these offerings can never benefit from having hundreds or thousands of suppliers essentially compete for the assignment thereby driving down the cost to build for the customer.

Long-time readers may already recognize a favorite Owls Nest theme at work here. There are few business models better than being the trusted conduit through which an impossibly fragmented supplier base reaches an infinitely fragmented customer base. 60% of Amazon orders are third-party where Amazon simply connects and provides confidence to the buyers and provides other services for related fees to the supplier. Apple is the toll taking intermediary between content and app creators and the 1 billion iPhone users. Google is…well…Google it. Floor and Decor’s merchants connect nameless, faceless manufacturers all over the world with hard surface flooring customers who don’t care about the manufacturer but love the merchandising, breadth of product, value and in-stock position at Floor &Decor. Goosehead functions in the same way in the personal lines insurance industry, and Avalara connects businesses of all shapes and sizes to the 14,000 US sales tax jurisdictions.

From the perspective of a product engineer who needs custom manufacturing services, think of the challenges of procuring and managing your supplier base. The underlying challenge that can never be solved without Xometry is that design engineers need a range of capabilities that no single manufacturer can provide. Xometry’s current menu covers 70 different materials, 15 different manufacturing processes, all necessary certifications and traceability requirements, and even carbon offset programs. Beyond that, it is impossible to be certain that any particular partner will have capacity when you need it. With Xometry there is always capacity. You will never need to find another supplier; Xometry does that for you. And there is always a sophisticated, trusted, financially strong partner with hundreds of millions of dollars in cash standing behind your order, while any individual small supplier may ultimately prove unstable. And there is always fair to exceptional pricing. It begs the question: why wouldn’t you just use Xometry?

The alternative to using Xometry is calling around to a bunch of people, seeing who has capacity, sending them the file, finding out how long they will need to do it, and negotiating on price. Even if you don’t have to qualify a new supplier, this process alone can take weeks. If you are busy trying to get a new product to market ahead of the competition, do you want to spend weeks on this when instant, easy, fully certified, and better pricing is readily available?

The Xometry marketplace is leading the digitalization of manufacturing. Xometry is, dare we say, the Amazon of custom manufacturing.

The long-term opportunity for Xometry is ridiculously large for a company with barely a $1 billion enterprise value. The biggest immediate opportunity is penetration of existing accounts of which there are already more than 30,000 active buyers on the platform. 95% of the revenue in any given quarter comes from prior existing customers. The advocates and evangelists are building up. Getting a few engineers that have used and loved Xometry inside a place like Lockheed Martin to grow to hundreds or thousands is not rocket science, and Xometry has been building out a direct salesforce to accomplish that now that it has proven its ability to deliver and scale. Overall, marketplace revenue will grow between 50-60% this year, and the number of accounts with over $50,000 of revenue is growing even faster. Total penetration and domination of a market as large as North American, European, and Asian custom manufacturing won’t happen overnight. People change habits slowly. I still read physical newspapers to the utter consternation of my children, for example. Digitalization, however, just makes too much sense, the timing is right, and Xometry’s clear vision and head start will make them difficult to unseat. That said, it may not take as long as it would otherwise because the current supply chain trainwreck has focused a very bright light on the need for flexible and resilient supply chains including domestic options. There is even a national security element to Xometry’ s value proposition since it greatly facilitates the onshoring of critical manufacturing.

Xometry is exciting, but it is just one of your ten that share common characteristics: experienced, visionary and aligned management teams solving huge problems in unique ways and armed with a resilient business model and a great balance sheet to ensure they can exploit their full opportunity. They will do well in great times and accelerate their share gains in bad times. Turbulent times like these with labor challenges, inflation, supply chain issues only play into Xometry’s strength as companies need to re-evaluate all their business practices. When you are disrupting (oops, buzzword again) a huge industry, you want people asking, “is there a better way?”. While the market cooldown is disquieting to all but the most stoic and long-term oriented, the collapse of growth stock valuations and the “not yet making money” economy has allowed us to buy XMTR stock at a fraction of last year’s price and has stuck a fork in any early-stage would-be competitors whose businesses or talent are now ripe for poaching on attractive terms.

I love creative destruction. I love that ours is an investment approach grounded in the real-economy and not in stock market mumbo jumbo, black boxes, or theoretical economic models that provide no comfort when challenged in bad times. I love that each of our companies makes our country a little better and a little more competitive in their own ways. And we get to partner with them and profitably participate. It’s a great job; it’s a great country.

P.S. Here is a link to a 3-minute video explaining the Xometry marketplace if you would like to see how they describe it from the customers perspective.

¹ David Epstein (2019). Range: Why Generalists Triumph In A Specialized World, page 153. A really enjoyable and thought-provoking work.

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