Proto Labs (PRLB)

Manufacturing services provider Proto Labs (NYSE:PRLB) announced better-than-expected revenue in Q1 CY2025, but sales fell by 1.3% year on year to $126.2 million. Guidance for next quarter’s revenue was better than expected at $128 million at the midpoint, 1.3% above analysts’ estimates. Its non-GAAP profit of $0.33 per share was 13% above analysts’ consensus estimates.

Company Overview

Pioneering the concept of online quoting and manufacturing for custom prototypes and low-volume production parts, Proto Labs (NYSE:PRLB) offers injection molding, 3D printing, and sheet metal fabrication for manufacturers in various industries.

Onshoring and inventory management–themes that grew in focus after COVID wreaked havoc on global supply chains–are tailwinds for companies that combine economies of scale with reliable service. Many in the space have adopted 3D printing to efficiently address the need for bespoke parts and components, but all companies are still at the whim of economic cycles. For example, consumer spending and interest rates can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Cimpress (NASDAQ:CMPR), Stratasys (NASDAQ:SSYS), and Xometry (NASDAQ:XMTR).

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Proto Labs’s 1.6% annualized revenue growth over the last five years was sluggish. This was below our standards and is a poor baseline for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Proto Labs’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can better understand the company’s revenue dynamics by analyzing its three most important segments: Injection Molding , CNC Machining , and 3D Printing, which are 38.6%, 41.9%, and 16% of revenue. Over the last two years, Proto Labs’s Injection Molding revenue (injection molds and parts) averaged 1.8% year-on-year declines, but its CNC Machining (custom CNC-machined parts) and 3D Printing (custom 3D-printed parts) revenues averaged 5% and 1.2% growth.

This quarter, Proto Labs’s revenue fell by 1.3% year on year to $126.2 million but beat Wall Street’s estimates by 2%. Company management is currently guiding for a 1.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 3.6% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below the sector average.

Proto Labs has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 45.3% gross margin over the last five years. Said differently, roughly $45.28 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Proto Labs’s gross profit margin was 44.1%, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Proto Labs was profitable over the last five years but held back by its large cost base. Its average operating margin of 1.6% was weak for an industrials business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Proto Labs’s operating margin decreased by 7.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Proto Labs’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Proto Labs generated an operating profit margin of 3.6%, down 1.7 percentage points year on year. Since Proto Labs’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Proto Labs, its EPS declined by 10.4% annually over the last five years while its revenue grew by 1.6%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Proto Labs’s earnings to better understand the drivers of its performance. As we mentioned earlier, Proto Labs’s operating margin declined by 7.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Proto Labs, its two-year annual EPS growth of 5.1% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.

In Q1, Proto Labs reported EPS at $0.33, down from $0.40 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Proto Labs’s full-year EPS of $1.56 to shrink by 5.6%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Proto Labs has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.3% over the last five years, quite impressive for an industrials business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Proto Labs’s margin expanded by 2 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Proto Labs’s free cash flow clocked in at $17.12 million in Q1, equivalent to a 13.6% margin. The company’s cash profitability regressed as it was 1.1 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Proto Labs’s five-year average ROIC was negative 0.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Proto Labs’s ROIC decreased by 2.7 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Proto Labs is a profitable, well-capitalized company with $96.85 million of cash and $3.14 million of debt on its balance sheet. This $93.7 million net cash position is 11% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Proto Labs beat analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock remained flat at $35.78 immediately after reporting.

Updated: July 7, 2025 at 11:27 PM EDT

When considering an investment in Proto Labs, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Proto Labs falls short of our quality standards. For starters, its revenue growth was weak over the last five years. And while its admirable gross margins indicate the mission-critical nature of its offerings, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

Proto Labs’s P/E ratio based on the next 12 months is 27.5x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $45 on the company (compared to the current share price of $40.12).