Standing out among the Street's worst performers today is Xometry, a specialty industrial machinery company whose shares slumped -6.3% to a price of $40.4, 33.15% below its average analyst target price of $60.43.
The average analyst rating for the stock is buy. XMTR lagged the S&P 500 index by -6.6% so far today and by -4.9% over the last year, returning -20.4%.
Xometry, Inc. operates a marketplace that enables buyers to source manufactured parts and assemblies in the United States and internationally. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.
Xometry does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-0.28 and $-1.97. We can see that XMTR has a forward P/E ratio of -144.3 and a trailing P/E ratio of -20.5. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the industrials sector has an average P/E ratio of 21.46, and the average for the S&P 500 is 15.97.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Xometry market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Xometry's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -1.02. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Xometry's operating margins have averaged -27.5% and displayed a mean growth rate of 4.0%. These numbers show that the company may not be on the best track.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Xometry's free cash flow, which was $-74,833,000.00 as of its most recent annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In XMTR's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-43,630,000.00 and they've been growing at an average rate of -86.6%.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Xometry's P/B ratio is 4.8 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 3.7 as of the third quarter of 2022.
Xometry is likely overvalued at today's prices because it has a negative P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has poor growth indicators because of its negative operating margins with high variability that are increasing, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into XMTR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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