Look at These 3D Printing Companies for Your Portfolio
Damian 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 expected to be one of the most disruptive technologies over the next decade. As 3D printer prices continue to fall, the penetration of these machines should increase exponentially. Actually, McKinsey Global Initiative, a widely recognized research firm, calculates that by 2025, the economic impact of 3D printing technology could surpass $550 billion yearly, mainly on the back of a growing exposure to consumer markets.
Within the industry, Stratasys (NASDAQ: SSYS), 3D Systems (NYSE: DDD), and ExOne (NASDAQ: XONE) seem like the strongest competitors. Expected to deliver robust EPS growth rates, are these companies worthy investments at their current (high) valuations?
Stratasys manufactures 3D printers and in-office rapid prototyping (RP) and manufacturing systems. By developing fused deposition modeling (FDM), a technology that allows its printers to build a model out of a 3D CAD design, the company’s products enable its users to manufacture customized parts in-house, relatively quickly and inexpensively. Moreover, these printers can handle a fairly wide array of plastic materials; this should continue to push adoption of this technology among medical, defense, and other sectors.
However, I believe that the key to the firm´s future profitability depends on its proprietary rights over the (high-margin) materials that its printers use. By making these plastics proprietary, the company has assured a constant source of income -- virtually impossible to tap for third party competitors -- once a printer is sold. Furthermore, high switching costs make this inflow not only continuous, but also quite stable.
In addition, the recent acquisitions of Objet and MakerBot further widen the company´s product offering. Although cannibalization risks exist, I believe that this will not be the case. Instead, sales should rise as the purchased companies seem to appeal to different demographics than Stratasys´ original products.
Going forward, its innovative and high-quality products position the firm ahead of its peers in terms of competitiveness. As 3D printing becomes popular and viable across several market segments, Stratasys -- the largest manufacturer of 3D printers for the professional market -- holds plenty of growth opportunities.
No need for glasses
3D Systems manufactures 3D printers and its aftermarket-related materials. With a market cap of $5 billion, it surpasses Stratasys’ size by about 25%. Having registered over $350 million in revenue last year, it is one of the largest in the industry, and the biggest in the U.S. Its wide array of products for both consumer and corporate end-markets make this company look like an appealing investment option.
However, trading at 76 times earnings, way above industry average valuations, is this stock worth the premium? It might be.
Similar to its previously analyzed competitor, “the combination of proprietary materials and differentiated printer units help the firm carve a narrow economic moat” (Morningstar) and should drive growth in the future, as the adoption of the technology rises. In addition, long development cycles provide 3D Systems with an advantage over new entrants and already existing competitors that cannot manufacture machines as sophisticated as the company's. With both its printers and proprietary materials generating high gross margins (of about 40%-50% and 65%, respectively), profitability should not be an issue going forward.
Going forward, declining prices, aided by the penetration of its Cube 3D consumer-oriented printer, are expected to drive growth. With analysts anticipating average annual EPS growth rates around 30%, this stock seems like a worthy addition to a growth portfolio.
The new entrant
ExOne is the third major competitor in the 3D printing arena, with a market cap of about $1 billion. Although it only went public in February 2013, its stock price has already experienced a rise of over 140%. The company focuses on the (extremely) high-end of the market, and its machines' prices reflect this. Valued the most expensive among the firms analyzed, at about 10 times its book value and 20 times sales, this stock seems a little expensive. However, investors have been betting on increasing sales volumes.
As expected, improvement did come: on Aug. 14, the company reported its quarterly results, delivering an increase in revenue of about 240%, year over year. Nevertheless, this outcome still disappointed investors and analysts, and this was reflected in its stock price, which plummeted about 15%, from $75 to under $64. Although this could seem like a good opportunity to chip in, I believe that the stock is still overvalued, especially as its growth prospects are not so appealing. “The bottom line is, no matter how fast a company is growing, the risk of buying any company at a very high Price/Sales multiple is an invitation to lose money somewhere down the road” (SeekingAlpha).
Besides its overvaluation, other matters like execution issues and problems with client financing could dissuade one from buying this stock. Although opportunistic investors could certainly take a risk and make big bucks, the chances of losing it all are quite high.
Within an industry that holds plenty of growth prospects and high barriers to entry, established players hold a strong lead and competitive advantages. Although the valuations of the above described companies could dissuade investors at first glance, further analysis reveals the real potential behind Stratasys and 3D Systems.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems, ExOne, and Stratasys and has the following options: short January 2014 $36 calls on 3D Systems and short January 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!