I'm confident that most investors have never heard of manufacturing marketplace Xometry (XMTR -1.07%). The stock has low trading volume, its shares are around their all-time low as I write this, and its market capitalization is below $700 million, which for a public company is fairly small. And yet, this obscure company reminds me of some of my favorite businesses.
As an investor, I try to use pattern recognition to my advantage. But I'm not looking for chart patterns like a day trader. Rather, I'm looking for business models that can create outstanding shareholder value. And Xometry might just be one of those opportunities -- although there are two important caveats.
The beauty of marketplace businesses
Xometry was founded in 2013. The platform hopes to modernize the world of manufacturing. Buyers go to Xometry looking for custom manufactured goods -- manufactured through processes including 3D printing, computer numerical control (or CNC) machining , and sheet metal forming. Xometry provides a digital way to place orders and offers fast bids. These jobs are then claimed by participants in a network of third-party businesses with the appropriate manufacturing capabilities.
Xometry also provides a marketplace for manufacturers to source the supplies they need.
In short, Xometry operates a two-sided marketplace just like Airbnb (ABNB -1.43%), Etsy (ETSY -2.10%), Udemy (UDMY -0.86%), and eBay (EBAY -1.57%) -- all businesses that I love because of their high profit potential.
Take eBay as an example. The company does have an investment portfolio, and changes in its value can disproportionately distort its net income according to generally accepted accounting principles (GAAP). But looking at just eBay's operations, it had a GAAP operating margin of 24% in 2022 -- quite good. And eBay's operating margin has been above 20% now for over a decade.
EBAY Operating Margin (TTM) data by YCharts.
If you prefer to gauge businesses based on GAAP net income, then use Airbnb as an example of the profit potential of marketplace businesses. When the pandemic started, management was unsure of what would happen in the travel industry. Therefore, it aggressively cut its operating expenses. However, Airbnb's business proved resilient. And because revenue grew while expenses fell, Airbnb turned in net income of $1.9 billion in 2022, giving it an eye-popping profit margin of almost 23%.
Marketplaces are so profitable because, for the most part, they aren't the ones providing the physical goods. They provide places for buyers and sellers to connect, a service for which they take a (high-margin) cut of transactions.
Promising developments at Xometry
Two promising developments at Xometry elevated this stock on my watch list.
First, its revenue is surging because the adoption of its services is also surging. In 2022, revenue grew 75% to $381 million. In part, that was due to its 45% year-over-year increase in active buyers -- it ended the year with nearly 41,000.
Gaining adoption is one of the hardest stages for a marketplace business, in my opinion. But Xometry is succeeding at it.
In this regard, Xometry reminds me of Etsy. At the end of 2019, Etsy had more than 46 million active buyers. But interest in handcrafted goods surged during the pandemic, and as of the end of 2022, Etsy had 95 million active buyers. Consequently, its revenue in 2022 was more than triple what it was in 2019. Moreover, platform adoption has proved resilient -- Etsy's active buyers only dipped 1% in 2022 despite a huge run-up in a short period.
Likewise, Xometry's platform appears to be sticky. According to management, on average, buyers that were new to the platform in 2016 spent 10.7 times more on it in 2022 than they did during their first year. That growth will be impressive if it continues.
Second, Xometry's gross profit margin is improving rapidly, and it's something management expects to continue with greater scale. Its gross margin was just 26% in 2021, but surged to almost 39% in 2022 -- an incredible year-over-year improvement, and one that offers reason for optimism about Xometry's long-term potential.
XMTR Revenue (TTM) data by YCharts.
In this regard, Xometry reminds me of unprofitable online-education marketplace Udemy. Udemy's gross margin jumped from 54% in 2021 to 56% in 2022 because its most-profitable business is also its fastest-growing business -- which likewise gives me hope for its future.
Two closing caveats
Travel, education, and e-commerce are enormous opportunities for Airbnb, Etsy, eBay, and Udemy, respectively. In manufacturing, Xometry management says its addressable market is around $2 trillion. However, it feels like it will be challenging to get that industry to fully adopt this type of digital service model. Management is guiding for around 25% revenue growth in 2023. But I'm not sure how high expectations should be for its long-term growth rate.
Another caveat: Xometry only went public in 2021. Therefore, management is still building trust with investors. It's hard to know how the team will manage the company's finances because its public track record isn't fully established.
That said, Xometry is a promising company to keep an eye on. Moreover, with its shares trading around their all-time low and at a dirt cheap valuation of less than 2 times trailing sales, investors don't have to pay a premium for this speculative investment. Therefore, for diversified investors seeking stocks with high upside potential, it could be worth opening a small position in Xometry.
