Defense And Space Manufacturing Adoption Will Drive Long Term Potential

Catalysts

About Velo3D

Velo3D provides advanced metal additive manufacturing systems and rapid production services for high value aerospace, defense, space, semiconductor and energy applications.

What are the underlying business or industry changes driving this perspective?

• Expansion of the rapid production services platform into long term, recurring production contracts for defense, space and semiconductor customers should steadily raise revenue visibility and support structurally higher gross margins as mix shifts toward services.
• Growing adoption of onshore, digitally certified manufacturing in U.S. industrial and defense supply chains, supported by programs with the Navy, Army and primes, is likely to drive multi year order growth and higher backlog conversion into earnings.
• Material and software innovation, including new high performance alloys and AI enabled process optimization through Dyndrite integration, can justify premium pricing and higher utilization rates, improving both revenue per system and net margins.
• Industry wide modernization in shipbuilding, munitions and hypersonic platforms, where Velo3D is already qualified on key programs, positions the company to capture incremental program awards that scale revenue faster than operating expenses and may increase earnings leverage.
• Balance sheet reinforcement through the recent equity raise and NASDAQ uplisting enables continued investment in capacity, automation and R&D at a time of rising demand, which may increase the probability of reaching EBITDA profitability by mid 2026 and could support a higher equity valuation based on earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Velo3D's revenue will decrease by 32.0% annually over the next 3 years.
• Analysts are not forecasting that Velo3D will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Velo3D's profit margin will increase from -147.8% to the average US Machinery industry of 9.3% in 3 years.
• If Velo3D's profit margin were to converge on the industry average, you could expect earnings to reach $1.4 million (and earnings per share of $0.06) by about December 2028, up from $-72.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 138.8x on those 2028 earnings, up from -1.5x today. This future PE is greater than the current PE for the US Machinery industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy reliance on U.S. defense and space budgets exposes Velo3D to political events such as government shutdowns, procurement delays or shifting national security priorities. Any of these could slow program awards, reduce RPS utilization and weaken revenue growth.
• The broader additive manufacturing industry may face slower than expected adoption in traditional sectors like shipbuilding, munitions and energy. This could limit the scale of recurring production contracts and cap long term margin expansion and earnings leverage.
• Despite recent capital raises, Velo3D is still generating substantial net losses and negative EBITDA. If RPS ramp or gross margin improvement underperform guidance, the company may need further dilutive financings that pressure earnings per share and equity valuation.
• Execution risk in scaling complex manufacturing, including qualifying new materials, integrating AI enabled software and transitioning to build to order systems, could lead to quality issues, delays or cost overruns that compress gross margins and slow the path to profitability.
• Intensifying competition in high value metal additive manufacturing and digital production platforms from larger, better capitalized players could erode pricing power, constrain revenue per system and limit future net margin expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $6.0 for Velo3D based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $15.5 million, earnings will come to $1.4 million, and it would be trading on a PE ratio of 138.8x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $5.37, the analyst price target of $6.0 is 10.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.