3D Printing Firms Appear Expensive Based on Industry Growth Rates
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
3D printing is a truly disruptive technology with a very bright future. Just because the industry is very strong it does not mean that the companies are fairly valued. Wall Street's affection with a stock and an industry comes and goes like the tide. 3D printing is a very powerful industry and continues to revolutionize manufacturing but the ability to produce star trek-esque replicators is not here yet. The industry as a whole deserves a great amount of attention and popularity, but investors need to get in at reasonable prices or increase their investment horizons to compensate for higher valuations.
Industry Outlook and the Price of Growth
Based on industry predictions an annual growth rate around 25% to 30% is expected until 2019. As prices for printers continue to fall and quality of printed models continue to increase, the industry is able to expand its reach into more areas of the manufacturing sector. It is important to note that a large majority of printers are still based on printing only one material while few finished goods are based on a single material. It is well known that for large product runs traditional manufacturing methods are still cheaper. Technology pundits find it very easy to hype 3D printing as though it were to replace the world's manufacturing methods over the next couple years while the reality is less exciting.
Regardless, a 25% industry CAGR for the next 7 years is a fanatic growth rate. As the technology develops and the printers are able to make increasingly complex models with multiple materials the applicable areas for the technology will continue to grow. It is important to remember that cost deflation and increased complexity and accuracy will be the main drivers of growth. This means that companies with a healthy patent portfolio and the best engineers will have a definitive advantage.
Where to invest
Stratasys (NASDAQ: SSYS) is one of the few public companies focused on rapid prototyping and rapid manufacturing. They are still waiting for government approval for their merger with the Israeli firm Object. This potential merger has added a significant amount of volatility to the stock and helped to give it a PE ratio of 75. Object's experience with multi-material printers would provide a distinct advantage to Stratasys. To err on the side of caution I feel that it is better to base future predictions only on Stratasys' numbers as the merger is still not set in stone. If Stratasys maintains growth in line with the historical industry CAGR of 26% then given the current stock price of $62, in 2017 the stock price would be $206 at the current PE ratio of 75 or $69 at a PE ratio of 25. Others using a CAPM model and a 10 year time frame put the a fair present value around $87. The company has no debt and a healthy quick ratio of 2.5 which makes it more attractive.
3D Systems (NYSE: DDD) is the main public competitor of Stratasys and has a slightly higher PE ratio of 79. Their total debt to equity ratio .37 is higher is higher than Stratasys but 3D maintains a strong quick ratio of 3.00. With a gross margin of 55.2% and profit margins of 10.3% they are very close to SSYS' gross margin 58.7% and a profit margin of 10.8%. If DDD maintains growth in line with the industry CAGR of 30% then given the current stock price of $46, in 2017 the stock price would be $146 at the current PE ratio of 79 or $46 at a PE ratio of 25.
Autodesk (NASDAQ: ADSK) offers a host of different software packages which are used for designing prototypes and models for manufacturing, architect, and a number of different industries. Although ADSK's software is used within the 3D printing industry the firm is not expected to see the same amount of growth as analysts are expecting 5.63% year over year growth rate in 2013 and a 17.05% year over year growth rate in 2014. The firm is currently going through a restructuring and bringing their cloud software online which should help to decrease operating costs. The company has no debt, a quick ratio of 2.0, and a ROE of 14.1%. At a PE ratio of 25 Autodesk is much more reasonably priced than DDD or SSYS. The continued growth of the building information modeling standard (BIM) will help to drive demand for the companies products over the long term.
Given the current growth rates and PE ratios, an investment horizon of 5 years DDD and SSYS already appear precariously close to being reasonable priced. Yes, taking expected industry growth rates and predicting future earnings on individual companies from theses numbers does mask some of the particularities of the individual firms. Regardless I believe this analysis is still useful and provides a good overview of the general growth prospects of the companies. As the 3D printing industry continues to grow, the larger market size will make it a more attractive market for other large design firms to develop their own products. For investors who are looking to invest on a 10 year time frame SSYS and DDD are still attractive. For those with a shorter time frame I believe ADSK offers a respectable way to invest in the world of computerized design at much safer PE ratios.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems. Motley Fool newsletter services recommend 3D Systems and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.