Strategy: Greg Hoffman

Cutting-edge technologies hold out exciting possibilities but for investors the rewards can be elusive

Search YouTube for videos about 3D printing and you’ll find all sorts of things. There’s talk of spacecraft carrying 3D printers to print their own spare parts and tools in an emergency, production of complex prosthetics and even working artificial human organs. This exciting technology has captured the imagination of many Australian investors, with tens of millions raised by companies listed on the ASX that are focused on 3D printing (or “additive manufacturing”) in recent years.

New technologies always present opportunities and threats. Whether it’s railroads in the 1800s, aviation and television in the 1900s or the internet in our current century, there are always big winners and big losers. But who will they be when it comes to 3D printing? Will it be those companies selling the services to others, or the companies that are their customers? Or perhaps it will be centred around certain industries like aerospace, vehicle manufacturing or defence?

Those attracted to this technology now have access to a number of investment choices across those various categories. ASX-listed companies involved in 3D printing in one way or another include Titomic (TTT), Amaero (3DA), AML3D (AL3), Aurora Labs (A3D), 333D (T3D), PPK Group (PPK), Oventus (OVN) and PWR Holdings (PWH). Some of these companies have raised significant sums of money from investors but are yet to produce any meaningful revenues in relation to their market valuations.

Titomic is the poster child of them all and provides an instructive example of a stock in a hot sector like this. The company listed on the ASX in September 2017 at an offer price of 20 cents per share. The chairman explained that the company “has exclusive rights to commercialise a proprietary and patented process for the application of cold-gas dynamic spraying of titanium or titanium alloy particles onto a scaffold to produce a load-bearing structure”.

I don’t really know what that means and I wonder how many of the company’s shareholders truly did either. But Titomic’s share price soared in the months after listing to strike a high of $3 in April 2018, so a float investor who was up 15-fold on their investment might have easily forgiven themselves for a lack of full due diligence.

At that peak, the company’s valuation was around $350 million and the next month Titomic announced the “official opening of the world’s largest and fastest metal 3D printer”. In the following financial year (2019), the company produced plenty of “manufacturing agreements” with an impressive list of clients, including the world’s largest aerospace manufacturer, Boeing.

In June 2019, Titomic projected that it would “receive revenue of between $3 million-$5 million during the period to December 31, 2019”, citing “revenue opportunities” across the aerospace, defence and other industry sectors.

Those who valued Titomic at $350 million in 2018 might have been hoping for perhaps $10 million or more

in annual revenue and at least $1 million-$2 million in profit by this stage, especially given the figures the company set out in June 2019. So how did the actual results stack up?

Titomic booked only $145,287 in revenue from its customers in the entire year to June 30, 2020 and made a loss of more than $10 million. That’s less revenue than my local corner store makes in a month, let alone a year, and far less profit.

At best we can say that things are taking longer than optimistic investors would have hoped. I don’t know enough about the sector or the stock to pinpoint the disconnect between previous lofty hopes and ambitions and the slower pace at which reality seems to be unfolding, but this is the kind of situation that I avoid unless I have deep knowledge or unusually high confidence in the company or its management. In this case, Titomic has seen three different leaders since its float (a CEO, a managing director and an interim CEO). At the time of writing it was seeking a permanent CEO. Such executive turnover always sends up a “ping” on my risk radar.

I wish Titomic and its investors all the best and I’d love to see it become a great Aussie success story in a growing high-tech sector. But, personally, I feel zero attraction to it as an investment proposition.

How the user sees it

Several companies are using, or looking to use, additive manufacturing processes in their existing operations. One of those is Gold Coast-based PWR Holdings, which designs and produces “cooling solutions for the high-performance automotive industry” (think radiators for Formula One, NASCAR and V8 Supercars).

PWR has an impressive track record in terms of product innovation and financial results. In December, it announced that it had “been awarded a Made in Queensland grant of $1.2 million for its leading-edge, state-of-the-art aluminium powder 3D printer”.

This kind of situation appeals to me more – a company with serious revenue (more than $65 million in 2020), established operations and blue-chip customers adding new technology into its business in a gradual way.

Oventus may be in a similar camp, although it’s not as well established as PWR. It manufactures oral devices (they look like fancy mouthguards) for those with sleep apnoea and is using additive manufacturing in the process. The idea is to “create a one-stop in-house process for making personalised mouth pieces that are individualised for each Oventus customer”.

At just over 20c per share, the company’s valuation is about $35 million but it recorded revenue of only $419,298 in the year to June 30, 2020. Oventus boasts the respected Thorney Group as its second-largest shareholder, so we shouldn’t write it off out of hand.

But I’m a sufferer of sleep apnoea and I don’t see myself switching from my trusty ResMed CPAP machine to one of Oventus’s devices anytime soon. And neither do the other sleep apnoea sufferers I’ve asked. No matter how advanced the manufacturing process or the material it’s made from, the end product must be a good fit for the problem it’s addressing and I’m not yet convinced on this one.

In the ‘too hard’ basket

Billionaire investor Charlie Munger recently gave an interview that I found helpful in thinking about this sector. He described a technology business that he’d invested in decades ago. The company’s invention was rendered valueless by the arrival of magnetic tape. “Technology is a killer as well as an opportunity,” he said, “and my first experience, it damn near killed me.”

Later in the speech he described how he puts much of his investing success down to his desire to avoid doing difficult things. “I put a lot in my ‘too hard’ pile,” he said, “and I’m not trying to succeed in my ‘too hard’ pile.”

If you happen to work in this area or have special knowledge of it, then there may be big opportunities for you to identify the potential winners and losers among the ASX-listed 3D printing stocks (please feel free to contact me via Twitter to let me know). But for me, they’re simply in my “too hard” pile for 2021.

Things are taking longer than optimistic investors would have hoped