The Big Risk To 3-D Stocks No One Talks About
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There's no denying 3D printing stocks have been on fire this last year and awareness of these stocks is growing after being mentioned in the State of the Union address. But in all the headlines no one has mentioned one big risk to these stocks, the Maker Movement, a vocal and growing group of DIYers who want to keep 3D printing an open source technology.
Makers Assault The Moat
This movement has a surprising backer, Amazon, with their investment in MakerBot, a private company that makes an at home 3D printer competing with the Objet30 Pro desktop printer and Mojo from Stratasys (NASDAQ: SSYS) and the Cube from 3D Systems (NYSE: DDD). It may seem that this maker movement is just a bunch of rogue geeks obsessed with hacking, sort of a latter-day Whole Earth Catalog hippie thing but a London hackspace has bio-3D printing available to members as well as more mundane 3D printing offerings.
In the US the maker movement's champion has been Chris Anderson, former editor-in-chief at Wired magazine who left to run his own 3D drone factory, 3D Robotics and authored "Makers: The New Industrial Revolution." In a recent interview with International Business Times he said of these amateurs in 3D, "Using history as a guide, those amateurs will reveal the true potential of that technology. It will be in their random and shambolic (messy and/or chaotic) experiments that we will discover what this technology is really for." He also said , "The maker movement is more likely to generate Elon Musks than the Internet."
These amateurs are only amateurs in the classical sense of the word as passionate practitioners. They are generating financial backing through crowdfunding and hacking groups, meetups, etc. Meetup and hackgroups are growing exponentially especially in the traditional innovative hubs like San Francisco. There are at least five communal hackspaces near Washington, DC, by no means a maker hub. And don't forget deep pocket angels like the aforementioned Amazon.
Most Threatened 3D Companies
RepRap.org, an open source community, is the most significant of these threats as it offers a free self replicating 3D printer. According to the first global survey of makers RepRap and Brooklyn based MakerBot were used by almost half the maker community with Stratasys, 3D Systems, and Objet all together taking up between a third and a quarter of the pie.
Source: Moilanen, J. & Vadén, T.: Manufacturing in motion: first survey on the 3D printing community, Statistical Studies of Peer Production. Available here.
MakerBot, in particular, is a challenger to be reckoned with as it opened its first retail store in NYC . It looks very exciting with workshops, classes, and materials available to help people learn how to use their MakerBot desktop replicator. Stratasys' recent merger with Objet gives them a bigger piece of this pie while 3D Systems lags. While both 3D Systems and Stratasys both have large industrial divisions, the maker movement could give both a serious run for the money at their nascent desktop printer divisions.
Another company that could see inroads on their dominant position is software company Autodesk (NASDAQ: ADSK), which pioneered 3D software when it came out with AutoCAD (computer aided design) in 1982. Although the company embraces amateurs with its Autodesk University and maker community outreach, more and more developers are expected to figure out their own software 3D solutions. Already Thingiverse and 3D Systems Cubify are offering software templates for 3D at home printing.
Is It Safe?
Easy gains have been made from 3D stocks in the last year. Can more gains be ahead? 3D Systems came out with disappointing earnings on Feb. 25 of $0.19 EPS and revenue of $101.6 million. Analysts expected $0.26 of earnings and revenue of $103.9 million sending the stock down as much as 15%. Stratasys also declined 10% intraday in sympathy.
Consider the three publicly traded stocks as legacy industries with decades of experience and capital poured into the 3D mold. Upstarts will proliferate and big cap companies will try to swat them down. Attorney Michael Weinberg predicts lobbying for regulation as well as initiating trademark and patent litigation will be likely pushbacks to makers. He says plainly the big 3D companies will characterize makers as "pirates and scofflaws" and demand redress.
All three 3D stocks are trading at extended P/Es, Autodesk at 35.76, 3D Systems at 83.63, and Stratasys at 79.33. This is after some significant pullbacks from their 52 week highs as these stocks had reached pretty rarefied heights. Citron Research recently came out with needles to prick the bubble ahead of those 3D Systems earnings.
A new competitor entered the fray on Feb. 7 with the debut of ExOne, which has negative EPS of -$1.49 and only has a market cap of $341.7 million. This latecomer to 3D printing, founded in 2005, may have just been riding the 3D wave as it hurried to come public.
Autodesk may have the most immunity as it has the most community. By reaching out to makers they invite them into the moat as co-creators. Stratasys with its Objet merger and many recent acquisitions should have a fairly impermeable moat and 3D Systems with three years of consecutive revenue increases looks good for earnings in the near term.
The Long View
Longer term the maker movement may be as disruptive to these moats as these companies were to traditional prototyping. While right now the objects that at home printers can make is sort of "gee whiz, that's kinda cool" tchotchkes the technology is available for much more ambitious projects as more prototyping materials and software come on line. Although these companies have been around for decades they are not unassailable and investors must take this threat into account.
leglamp 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!