Materialise Earnings Preview: Expecting Solid Q2 Results With Improving Profitability; Sum of the Parts Analysis Supports Bullish Thesis
Materialise MTLS 0.00%↑ is slated to report 2Q24 earnings on Wednesday, July 31st before markets open. We expect Materialise to report revenues relatively in-line with analyst expectations, which implies sales growing 4.5% Y/Y to €67.7M. Our confidence is driven by sustained strength in the Company’s Medical division. Furthermore, although European manufacturing PMIs remain in contracting territory, we believe growing production applications will help offset near term challenges in the Company’s Manufacturing segment. We also expect Materialise to continue to show improving operational efficiencies and would not be surprised to see Materialise exceed analyst €3.2M EBIT estimates. Driven by another quarter of strong execution, we believe the Company remains on-plan for the year and reiterates full year guidance.
Coupled with strong fundamentals, we believe Materialise enters Q2 earnings with a positive technical set up. As shown in the chart below, Materialise has been trading in a consolidated range since March 2024, but broke out crossing the 150-day moving average on July 18th. This coincided with the day Materialise announced the acquisition of FEops, a Belgian company that develops AI-driven simulation technology to improve procedure efficiency and clinical outcomes for structural heart interventions. We believe a strong quarter that shows improving profitability could send shares higher and break a 3-year down trend.
Materialise is one of our top stock picks as shares continue to trade at an all-time low valuation despite their ability to continue to grow in a tough macro environment. Materialise is currently trading ~6x EV/EBITDA multiple based on 2025 consensus estimates, which compares to the 5-year average of 40x. While weakness in the stock performance has been largely attributed to poor sentiment across the entire additive manufacturing sector, we believe shares have been significantly oversold. Demand for 3D printing patient specific surgical tools and implants continues to rise, and driven by pent up demand for elective surgeries and expansion into new applications we expect the Medical business to continue to see double digit growth for the next several years. Furthermore, the Manufacturing segment has positioned itself as a leading service provider of 3D printed production parts, which we expect to drive high-single digit growth. Lastly, we expect profitability to improve under the company's new CEO. These all support our bullish stance and expectation for multiple expansion, which drives our $15.09 price target.
Sum of the Parts Analysis
Although our price target is based on a 5-year DCF model, we believe it can be helpful to show the tremendous upside potential by doing a sum of the parts analysis on Materialise’s 3 distinct business segments.
Link to full 5-Year financial model here.
Materialise Software segment offers software that enhance the functionality of 3D printers and manage enterprise wide 3D printing workflows. This segment has been challenged over the last couple years with sales basically remaining stagnant between €40 - 44M in annual revenues since 2019. Furthermore, while historically this division produced 33%+ adjusted EBITDA margins, increased investments around their new Co-AM platform has materially compressed adjusted EBITDA margins to mid-teens. Looking long-term, we do believe Materialise produces some of the best additive manufacturing software in the industry and as macro conditions improve, we believe this segment can grow at least ~5% annually. In addition, we expect high investment spend to normalize and expect adjusted EBITDA margins to “conservatively” return to 25%+ in 2025. By conducting a simple relative valuation analysis based on our 2025 adjusted EBITDA estimate of €11.7M and using a conservative software EV/EBITDA multiple of 10x, we attribute €117M in value to the software business.
Materialise Medical segment provides medical software that allows medical-image based analysis, planning, and engineering, as well as patient-specific design and printing of surgical devices and implants. The Medical business has been the Company’s growth engine since going public, growing from €60.8M in total revenues in 2019 to €101.4M in annual sales in 2023. Furthermore, this segment has seen impressive margin expansion with adjusted EBITDA margins growing from ~18% in 2019 to 33.6% in 4Q23. We believe demand for their patient specific medical devices and implants remains in the early innings of adoption. We believe their expansion into the US and into new applications will drive double-digit revenue growth over the next 5 years. By conducting a simple relative valuation analysis based on our 2025 adjusted EBITDA estimate of €38.3M and using a blended medical EV/EBITDA multiple of 15x, we attribute €575M in value to the medical business.
Materialise Manufacturing segment produces 3D printed prototypes and production parts for several industrial and consumer industries. The Manufacturing segment has seen steady growth, growing from €89.3M in 2021 to €110.3M in 2023. However, this division has been the lowest profit generating segment, with only mid-to-high single digit adjusted EBITDA margins. That said, we believe the Company is moving more into production applications with key customers, which we believe is a higher margin business and helps grow revenues mid-to-high single digits for the foreseeable future. By conducting a simple relative valuation analysis based on our 2025 adjusted EBITDA estimate of €8.5M and using an EV/EBITDA multiple of 10x, we attribute €85M in value to the manufacturing business.
Using a sum of the parts analysis, the total enterprise value of Materialise would be €777M [€117M (Software) + €575M (Medical) + €85M (Manufacturing)]. When adding back the €77.5M in net cash the total market cap estimate would be €855M. Given Materialise ADR trades in US dollars on the NASDAQ exchange we adjusted the market cap into dollars using a 1.09 exchange rate. This translates into a total market cap of $931M or $15.75 per share assuming their current 59.1M share count. Note the current market capitalization of the company is ~$350M, implying over 150%+ upside using a sum of the parts analysis and is in-line with our DCF valuation method.
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