On the Road: Kornit Digital


      The ability to meet some of the brightest, most interesting, and passionate people leading businesses at the forefront of growth industries has always been a perk for people working in the investment management business.

      Before the pandemic, that perk often came in the form of face-to-face meetings. But whether in person or virtually, the benefit ultimately came from the rapport one would establish through the constant “polling” of these thought leaders.

      One such example of a relationship that has been more virtual than it has been face-to-face is an investment Pembroke made in an Israeli-based manufacturing company four years ago: Kornit Digital (KRNT US).

      Kornit is also an example of a company that is providing solutions to an industry that has hit an inflection point with the onset of the COVID-19 environment. As in other industries, numerous factors have exposed shortcomings and accelerated trends in the digital printing market. In the case of Kornit Digital, these trends are playing to their advantage.

      What Do They Do?

      Kornit Digital manufactures digital printers for the textile industry. The focus until now has been direct-to-garment solutions, selling machines to a range of customers from screen printers to fashion brands and small online artists.

      Kornit’s business is a traditional razor and razor-blade model with a core technology and a future stream of related consumables.  The core proposition for owning the company has remained effectively unchanged since our initial investment: in an industry rife with waste and over consumption (i.e., the fashion industry), Kornit has built a leading product that addresses the fundamental application of their customers in an increasingly economical and environmentally conscious way.

      Framing the Market Opportunity

      Prior to our initial investment, one major concern was about the size of the ultimate market for digital textile printing. Although the overall textile printing market is measured in the tens of billions of US dollars, if digital print manufacturers could not overcome limitations around colour and fabric ranges, unwanted odours and poor economics, our concern was that their solution would be relegated to prototypes and very small production runs.

      The demand from customers certainly seemed real as the fashion industry was aware of the operational risk of continuing to do business the old way: gambling on the number of units the market will ultimately buy, tying up significant working capital with large production runs in low-cost labour jurisdictions, and ending up with months of inventory in transit ahead of fashion selling seasons.

      During COVID-19

      Following the sharp decline in global equity markets in February and March 2020, investors started to appreciate that the COVID-19 environment was forcing Kornit customers to rethink their strategies. At a time when Kornit was pushing forward with technological advancements, customers were embracing the possibility of producing shorter production runs closer to end markets.

      In its public comments, Kornit’s management team has referenced numerous conversations with customers excited to “partner” with Kornit to help them solve some of the previous industry challenges. The adoption of digital printers appears to be at an inflection point.

      While the fashion industry is questioning the economics of its existing business model, the world is increasingly focusing on manufacturing’s environmental impact. According to Kornit, the fashion industry is the second most water-intensive industry worldwide. It currently produces some 20% of the world’s wastewater.[1]

      The statistics are staggering. The production of one item of apparel is estimated by Kornit to require 3.97 litres of water. This compares to the average daily drinking water needs of 3.2 litres per person.[2] Kornit’s digital printing solution, however, is much less water intensive than traditional analogue printing, because it uses no pretreatment, steaming or washing.[3]

      Based on the company’s five-year growth goals through 2026, Kornit believes that by 2026 it can enable the production of some 2.5 billion on-demand apparel items, and that overproduction of some 1.1 billion items of surplus apparel can be avoided.

      Those efficiencies, along with Kornit’s less resource-intensive process, could reduce industry water consumption by an estimated 4.3 trillion litres, and greenhouse gas emissions by an estimated 17.2 billion kilograms over the period.[4]

      The Path Forward

      Kornit Digital continues to lead competitors from a technical standpoint at a moment when industry participants look for both better economics, and ways to do business with less environmental harm.

      The addressable market for digitally printed apparel is large in comparison to Kornit’s current footprint, and the ability to compete in the direct-to-fabric market, a market many times the size of Kornit’s core direct-to-garment market, may be underappreciated.

      Valuation has proven to be the most challenging part of being an investor in the stock. When growth companies experience a potentially transformational shift in end markets, there are many probabilities that need to be factored into valuation.

      What is the probability of the new market taking hold? What are the probabilities that the company under consideration will win a particular market share? What are the probabilities of currently unknown new technologies further disrupting the competitive landscape? How much of this is reflected in the current share price?

      Taking a long-term approach to our price targets is one way we allow some of these probabilities to play out and prevent ourselves from succumbing to myopia. We balance short-term valuation with long-term potential and focus on the successful execution of the business.

      In this way, our views about current valuation, ongoing business progress and long-term prospects are balanced and reflected in the portfolio weight. Kornit remains a top-10 holding in our US growth strategy.


      [1] See Kornit Digital: KORNIT 2020:Governance Corporate and Social, Environmental Goals Future and Action, Progress IMPACT REPORT, pages 6 and 24.

      [2] Ibid, see also the World Wildlife Fund and for estimates of the water footprint of apparel. See also the Mayo Clinic for a discussion of average daily human drinking water needs.

      [3] Ibid, page 6, see also page 24 for Kornit’s water efficiency under The Story of Water

      [4] Ibid, page 6




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