Materialise NV: A Hidden Gem in 3D Printing with 35% Upside Potential

Materialise NV (NASDAQ:MTLS), a leader in 3D printing software and medical solutions, is trading at a significant discount to its intrinsic value despite robust growth in its high-margin Medical segment and improving free cash flow. A discounted cash flow (DCF) analysis and peer comparison reveal the stock is undervalued by 35%, presenting a compelling entry point for investors. Here's why MTLS is poised to deliver outsized returns.

DCF Analysis: A 35% Undervaluation Case

Materialise's Base Case DCF valuation arrives at an intrinsic value of $8.42 per share, compared to its current price of $5.49. This 35% discount is driven by:
1. Strong Free Cash Flow Growth: In 2024, operating cash flow surged 56% to €31.5 million, while capital expenditures remained under control, resulting in €5.1 million in free cash flow (FCF).
2. Medical Segment Dominance: The Medical segment, which accounts for nearly half of revenue, grew 18.7% in Q1 2025 and enjoys a 29.1% EBITDA margin—far superior to its Software (6.1%) and Manufacturing (-1.5%) segments. This segment's recurring revenue model (software maintenance licenses) and high-margin products (e.g., surgical planning tools) are key to sustained FCF generation.
3. Growth Outlook: Management projects 2025 revenue of €270–285 million, up 1.3%–3.9% from 2024, with Adjusted EBIT improving to €6–10 million. Even in a conservative scenario, FCF should expand as the Medical segment scales.

Peer Comparison: MTLS Trades at a Discount to Slower-Growing Peers

Materialise's P/E ratio of 30.3x is below both its peer average (31.7x) and the US software sector's average (41x), despite its 30.1% estimated growth rate—the highest among peers. Key contrasts:
- MITK Mitek Systems (MITK): P/E of 32.7x but negative growth (-48.8%) and weaker margins.
- CCSI Consensus Cloud Solutions (CCSI): P/E of 5.2x (cheap, but…): its growth is only 8.2%, and it faces margin pressures.
- TRAK ReposiTrak: P/E of 58.4x despite a 30.1% operating margin—overvalued relative to its risk profile.

Materialise's Medical segment is its crown jewel, yet peers like TRAK and PERF lack comparable recurring revenue models or margin strength. This structural advantage justifies a premium, but MTLS remains undervalued.

Why Now Is the Inflection Point

1. Medical Segment Traction: The Medical division's deferred revenue grew 5,878 kEUR in Q4 2024, signaling strong demand for its software-as-a-service (SaaS) products. With hospitals increasingly adopting personalized surgical tools, this segment's growth could accelerate.
2. Debt Reduction: Gross debt fell to €41.3 million in 2024 from €64.4 million in 2023, easing financial risks and freeing cash for reinvestment.
3. Cost Discipline: Operating expenses rose only 2.2% in 2024, while revenue grew 4.3%. Management's focus on efficiency will further boost margins as scale improves.

Risks to Consider

• Macroeconomic Headwinds: Manufacturing and Software segments remain exposed to economic slowdowns.
• Regulatory Risks: Medical device approvals can delay revenue.
• Stock Volatility: MTLS has a history of price swings, with shares hitting $4.16 in 2024.

However, the Medical segment's recurring revenue model and strong FCF generation mitigate these risks.

Investment Thesis: Buy MTLS for 35% Upside

Materialise NV is a buy at $5.49, with a price target of $8.42 based on DCF and a relative valuation target of $10.96. The stock's 35% undervaluation, coupled with its Medical segment's growth and margin resilience, positions it to outperform peers. Investors should:
1. Buy on dips: Use volatility to accumulate shares.
2. Hold for 12–18 months: The Medical segment's growth and margin expansion will likely narrow the valuation gap.
3. Monitor free cash flow: Positive quarterly FCF trends (despite Q4 2024's dip) are critical to sustaining the bull case.

Conclusion

Materialise NV is a rare blend of value and growth in a high-margin, niche market. With its Medical segment driving scalable FCF and peers trading at richer multiples despite weaker fundamentals, MTLS offers a compelling 35% upside potential. This is a stock to watch as it transitions from undervalued to fairly valued—and beyond.

Investment rating: Buy