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We learned everything we know about fashion from watching the movie Zoolander. In other words, we don’t know much about the world of runway models and runaway fashion trends. It’s a joke we’ve made before when researching startups using artificial intelligence for selecting and designing fashion apparel. This fashionable use of AI got a ton of exposure a few years ago when Stitch Fix (SFIX), which uses AI algorithms to personalize clothing, went public back in November 2017. Since then, the company has lost 40% of its value versus an 81% return for the Nasdaq, despite reaching more than $2 billion in revenue last year. Maybe it wasn’t the best idea to let employees work when they felt like it? Fashion aside, one investment thesis that we are keen about is on-demand manufacturing, and an Israeli company called Kornit Digital is employing a similar business model to the garment and fabric industry.
The global apparel market is big business at an estimated $1.5 trillion. At least that’s the number you’ll find on Statista, which doesn’t reveal the original source of the data. We’d need to shell out $750 a month to get that privileged information, but it seems safe to assume that the textile market is worth well north of $1 trillion. Now, getting from there to the value of the digital textile printing market is far trickier. A more reputable outfit called Smithers (no relation to the Simpsons character, as far as we can tell) estimates the digital printed textile market to be worth about $4.3 billion, growing to $7.9 billion by 2026. While that doesn’t seem like a very big total addressable market (TAM), more than 90% of printed textiles today still rely on analog printing processes, such as screen printing, so there’s room to grow.
The bull case argues that the world is going full-on digital and that the textile industry can’t afford to be left behind. Part of the narrative goes back to the on-demand manufacturing model: On one hand, consumers want to personalize everything, because slapping someone else’s cool logo on your chest shows that you’re an independent thinker, if you order it in red instead of blue. On the other hand, companies are losing money by carrying excess inventory, especially in an industry as fickle as fashion. Digital printing offers the best of both worlds: Customers can shop online, where customized orders can be fulfilled anywhere in the world where a specialized inkjet textile printer is located.
Digital printing can also disrupt one of the world’s dirtiest industries. The World Bank estimates that as much as 20% of industrial water pollution comes from textile dyeing and finishing treatments. Some 72 toxic chemicals have been identified in water solely from textile dyeing – 30 of which cannot be removed. In comparison, inkjet textile printing itself reportedly wastes zero water. In addition, the on-demand system means much less excess inventory ends up in landfills or Third World countries. In fact, ESG types might find a lot to like about Kornit Digital stock. Our criteria for investing in green tech companies is driven more by the bottom line, so let’s take a closer look at the company.
Founded 20 years ago, Kornit Digital (KRNT) commercialized its first digital printing system for textiles way back in 2005 and went public a decade later in April 2015. Kornit appears to be building some real traction for its patented inkjet technology (more on that shortly), based on its recent revenue trajectory. The company increased revenues by more than 66%, from about $193 million in 2020 to $322 last year. Since its IPO seven years ago, the company has returned about 400% versus 150% for the Nasdaq, with most of the volatility coming during the recent yo-yo years of the pandemic. As retail investors, we’re not interested in stock volatility but long-term viability of a company. That requires us to take a deeper dive into Kornit’s technology and business.
Kornit has developed a line of specialized inkjet systems, as well as its own proprietary and patented inks, for on-demand printing for both garments and fabrics. While the direct-to-garment (DTG) printers generally involve printing on finished garments, the direct-to-fabric (DTF) machines print on fabrics that are later turned into finished products such as garments or home decor. The underlying technology for both types of systems employs a wet-on-wet printing methodology that integrates curing into a single-step process. The inkjet printheads deposit colors on a wide range of untreated natural and synthetic fabrics, including cotton, wool, polyester, and lycra.
Last year, the company rolled out its latest and greatest hardware and software solutions. For starters, it introduced Kornit MAX technology to up level the quality and speed of its DTG printers by adding new processes and consumables capabilities. The new platform also supports another innovation called Kornit XDi, which leverages the new consumables to print multiple layers to create 3D effects. On the DTF side, Kornit introduced the Presto MAX, which it claims is the first digital print system to offer white printing on colored fabrics and also features the XDi component for creating 3D effects.
Tying it all together is KornitX, an end-to-end software solution that the company believes will help make it the “operating system for on-demand sustainable fashion.” The cloud-based platform connects front-end “demand generators” such as online stores and brands with digitized on-demand production and fulfillment providers. Orders are routed and managed to facilitate the most efficient on-demand production on a mass scale. This is how Ronen Samuel, CEO of Kornit Digital, described KornitX in an interview:
“What we are enabling [online stores to] have [are] endless types of products. They can go and even present a catalog of all the products [that have ever] been produced for Michael Jordan. You can choose anything from the catalog, on any type of T-shirt, in any shape, in any color. Once you order it and pay for it, only then is [it] produced. If you are in New York, it will be produced in New York … This is KornitX.”
The software powering KornitX isn’t homegrown but comes from a cloud-based software workflow company called Custom Gateway, which Kornit Digital bought in August 2020 for $16.9 million in hard cash. It is one of three acquisitions in the last couple of years. In August 2021, Kornit acquired the assets of Voxel8, a 3D printing company that specializes in footwear and fashion accessories, for $15 million. That acquisition represents something of a new line of business for Kornit but there aren’t a lot of details where that’s going yet. Finally, not willing to wait until August 2022, Kornit bought a company called Tesoma at the beginning of this year for about $11.5 million to acquire its textile curing solutions.
From the outside looking in, these acquisitions certainly seem to make sense as Kornit seeks to solidify its position as one of the leading digital textile printing companies.
Kornit Digital thinks its principal competition isn’t other digital printing systems but manufacturers of analog screen-printing systems. However, that doesn’t mean there are no other digital textile printing companies. For example, there’s aeoon Technologies, a European digital DTG company building a line of printers that use 100% water-based inks, among other related products. In the DTF market, MS Printing Solutions is at the top of the list. A subsidiary of Dover Corporation, a U.S. conglomerate of industrial manufacturing, MS Printing Solutions produces textile printers, along with textile steamers and dryers. How Kornit might stack up against the competition is beyond our scope here, but it provides a bit of situational awareness as we weigh the value of this stock.
Of course, Kornit is far more enthusiastic about its customers – more than 1,200 and counting. That comes with a caveat, as its 10 largest clients accounted for 57% of revenues last year. And the single largest customer clocked in at more than a quarter of all revenues, climbing from 11% in 2020 to 27% in 2021, which is definitely a big part of the big spike in revenue between those two years. It’s a little company that you may have heard of – Amazon.
The e-commerce giant committed to spending $400 million back in September 2020 on printers, consumables, and services. Amazon has reportedly been using Kornit printers for a few years to support its Merch by Amazon business, a service that lets independent designers focus on the creative work and let the company do all the heavy lifting of production and shipping. Amazon is also an investor, with a 4.75% interest in Kornit.
Dealing with Amazon so deeply could be a double-edged sword, but it certainly seems to be working in Kornit’s favor for now. Still, we’d like to see less customer concentration over the long haul. Another thing that would make us like Kornit Digital Stock more is if it can continue to grow its consumables and software subscription services as a total percentage of revenues:
However, we’ve seen enough for us to like what Kornit is doing. The company has been around for 20 years and is even marginally profitable. It seems to be maturing – through smart acquisitions and the Amazon mega-deal – at just the right time given the seismic shift to digital everything. At its current market value, the stock is trading at a reasonably good price based on our simple valuation ratio (market cap of $3.5B/annualized revenues of $322M) of 11, with 40 being too highly valued. Our Nanalyze Disruptive Technology portfolio is already heavy in green tech stocks, not to mention distributed manufacturing, but Kornit Digital does offer a new twist with the on-demand, virtual factory model that is also trying to be environmentally friendly.
When your biggest client is the largest company in the world, you find yourself catering to their every need so as not to disrupt the sacred cash cow. Amazon has all the leverage in their relationship with Kornit, and that’s a risk investors need to monitor closely. While we don’t have any idea of just how big the total addressable market is for Kornit’s offering, it’s sure to delight ESG investors who want to see less chemicals introduced to the environment. As for all those soon-to-be unemployed Bangladeshi folks who were responsible for the country’s $35.81 billion in 2021 apparel exports, out of sight, out of mind. The most important thing about ESG investing is how it makes you feel.
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