Dear 3D Printing, Growth Isn't Everything
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world of 3D printing is always exciting with many high profile acquisitions. Stratasys (NASDAQ: SSYS) has seen its stock price grow with its recent acquisition of MakerBot, but the firm is still valued very aggressively. The entire 3D printing market is expected to reach $4 billion around 2015, and the market caps of Stratasys and 3D Systems (NYSE: DDD) are already above $3.1 billion each. It is time to take a hard look at the bullish arguments used to support such valuations.
Will 3D Printing Take Over the World?
The idea of 3D printing tickles the egalitarian fancy for cheap and effective manufacturing throughout every American house. The reality is a tad different. In 2012, it is estimated that printers available below $5,000 accounted for just 6.5% of all 3D printers sold. The segment's growth rate has declined from its previous highs. The real growth in the industry comes from using 3D printers to make end products in addition to prototypes. For parts made with expensive metals like titanium, 3D printing is a good way to reduce costs.
When new entrants want to enter the 3D printing market, they are forced to partner with one of the big 3D printing firms. Stratasys and Hewlett-Packard (NYSE: HPQ) have partnered together to create 3D printers under HP's label, but HP remains a traditional tech company. While its printing segment provides 22% of the company's recent quarterly revenue, its entire consumer hardware sales are only 9% of the segment's revenue. In comparison, commercial hardware sales provided 23% of the segment's revenue.
HP is on the rebound with its new moonshot servers. After taking some write-downs last year, it is an attractive value play. While it is expected to post earnings per share (EPS) of $3.65 in 2014, it is important to remember that cheap 3D printers are not driving the firm's rebound.
Where Are Pubic 3D Printers Heading?
Mass market consumer manufacturing firms like Foxconn see little future for 3D printers. It is in high cost aerospace and medical products where 3D printing is being used to create end products. Stratasys has over 550 patents and patents pending. The company is active in the medical field and is working with scientists at MIT to print artificial bone. The firm's photopolymers are used in the production of hearing aids and dental products.
Even with its strong product offerings, potential investors in Stratasys need to have a long investment horizon to justify its valuation. In 2014, it is expected to post an EPS of just $0.49, while its current stock price is around $80. Thankfully, the company's balance sheet is clean, with a total debt to equity ratio of 0 and a quick ratio of 2.9.
Like Stratasys, 3D Systems sells a number of printers for the medical and aerospace industry. To increase its offerings in the manufacturing sphere, 3D Systems recently purchased Phenix Systems. Phenix's direct metal selective sintering printers are a good fit for the aerospace industry as it uses many high-performance metals.
3D Systems is valued a bit more reasonable than Stratasys, as it trades around $45 per share and is expected to make $1.17 per share in 2014. Still, the company is not without risks. If the Chinese government makes 3D printing a national priority, U.S. companies could suddenly find themselves competing with very well financed competitors that do not need to respect U.S. patent laws. 3D Systems carries little debt with a total debt to equity ratio of 0.1 and a quick ratio of 2.4.
The 3D printing industry is growing, but it will not grow indefinitely. Making inroads to the world's manufacturing industry takes time and significant R&D budgets. Investing in Stratasys and 3D Systems is risky, given their high valuations at more than 35 times 2014 earnings. To justify these valuations, investors need to bet that these firms will continue growing until 2020 and beyond. For risk adverse investors and value investors it is hard to make a strong case for 3D Systems or Stratasys, given their valuations. Hewlett-Packard is a different story as it is turning itself around and is a better value play.
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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!