Is The Recent Panic In 3D Systems Warranted?
Deniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a recent sense of panic surrounding the 3D printing industry leaders 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS), as both companies have experienced significant declines in stock price in the month of September. Both DDD and SSYS have taken 20% haircuts in the last month as investors have been flocking out of the company, some taking profits while others flustered by the volatility. This “sky is falling” mentality is unwarranted as company fundamentals remain unchanged from when the stock was rallying earlier in 2012, but floating rumors are having a large effect on the stock price.
JPMorgan issued a statement concerning Formlabs, a potential competitor challenging the influence of DDD on the low-end of the market for 3D printers. This [private] start-up company recently introduced a cheaper alternative to stereolithography (SLA) technology 3D printers called the Form 1. Albeit, the young company showed great potential by exceeding its kick-start fund-raising target to sell $100,000 worth of their product. Not to be misunderstood, I believe Formlabs is an intriguing company increasing the exposure of 3D printing technology, but with 12 employees and one current product, I fail to see how they can contend with industry giants like DDD and SSYS. To add, there are several private 3D printing companies around the world - Asiga, Buildatron, Essential Dynamics, to name a few - who stimulate a competitive environment influencing the market leaders to stay ahead of competition through innovation.
The JPMorgan note raises questions regarding the investment bank’s objectivity. Were they holding a short position in DDD when they release a statement, prematurely, about a start up company having potentially negative effects on the sustainability of 3D Systems’ operations? If Formlabs continues on their alleged growth trajectory, one day there might be some merit to this competitive threat. However, when needed, DDD has shown the willingness to eliminate such threats by acquiring competitors, such as actions taken with Z Corporation earlier this year.
A greater potential threat to DDD would be competition in the market from established printing companies such as HP (NYSE: HPQ) or Lexmark (NYSE: LXK). Both companies have been facing a decline as they struggle to keep up with the advancing innovation from competitors. As a result, Lexmark cut its printing department from future plans, allowing the company to possibly search for new opportunities.
The descent of a giant household name like HP has raised questions about their new strategy to remain relevant in the market. HP CEO Meg Whitman strives to increase innovation in the company’s core computing business to endure the frenzy of consumers shifting to Apple (NASDAQ: AAPL) products while integrating new ideas into penetrating potential markets. HP is looking to make a move back into the booming smartphone space after their first failed attempt with the Palm in 2010. This new tactic follows the recent failure of the HP Touchpad tablet which needed a sharp price reduction to boost sales. Without an apparent strategy moving forward, HP is trying to throw as many ideas on the wall to see what sticks. Will 3D printing be next on their list?
3D printing could be a rejuvenating market for an aging company like HP. Obviously the parallels between the two are apparent causing some circulating buzz that may have contributed to the volatility of the two 3D printing stocks; DDD and SSYS. Earlier this summer, HP cut its only tie with the 3D printing market by terminating their agreement with Stratasys. This unexpected decision left investors pondering the future of HP in the innovative 3D printing technology. Was this a sign that HP was not interested in this market? Or did this halt with SSYS signal that the largest printing company in the world will soon enter the sector?
With close to 600 combined patents, DDD and SSYS erect a strong defense with rigid barriers to entry for any company, even one with HP’s resources, to penetrate the market alone. It might even prove to be cheaper and more favorable for the printing giant to buyout one of the smaller 3D printing companies to enter the market, rather than engage in patent wars.
And yet, there was an opportunity for HP to enter the 3D printing market after it cut ties with SSYS, but the management team seemed to focus their energies on other markets, for the time being. This fact, along with HP’s struggles, should provide some relief for panicking investors in 3D Systems (and the broader 3D printing industry), at least until HP or any other large threat make clear intentions to compete. The potential of the 3D market will entice much demand for entry from mainly smaller companies, like Formslab; however the existing leaders will be at an advantage due to their experience and economic moat.
The exaggeration of increased 3D market competition should be analyzed with the reality of DDD’s potential. Nothing material has transpired within the company to warrant the substantial sell off seen of late. Perhaps an opportunity exists to buy into this name on the weakness.
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Fool blogger Deniel Mero is long shares of 3D Systems Corp. He has been long for quite some time and has no intention of altering his position in the forseeable future. The Motley Fool owns shares of Apple and 3D Systems and has the following options: short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Apple, 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.