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The 3D Revolution Will Come - But Not Today

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What one industry could take down Amazon (NASDAQ: AMZN) and China… but not before redefining the way we deliver and receive healthcare?

If you said 3-D printing, you get a gold star.

On the pages of The Fool – and throughout the internet – you’ve heard the future of 3-D printing touted. It’s changing healthcare – already, a new, 3-D printed jaw has been used in a surgery, resulting in a cheaper, faster procedure, and faster, more comfortable recovery. The recipient was speaking upon waking – entirely unheard of without 3-D technology. The precise, customized fit and the strong, light honeycomb design are mostly responsible.

And that’s just the beginning for 3-D printing in healthcare. Researchers are working on printing out entire organs… they already can print out a bone substitute that dissolves as natural bone replaces it… and late last year scientists in Germany mastered the printing of blood vessels, overcoming one of the biggest hurdles in creating working artificial organs.

As big as that is, though, it will probably pale next to the full impact of 3-D printing. Called ‘the third industrial revolution’ by The Economist, it is that – and more.

Thanks to 3-D printing, China may be out of a job. Who needs to buy cheap manufactured goods from Asia when you can print out anything you want from your home 3-D printer – a factory in a box?

Amazon may go the way of Netflix. Who needs to order goods for delivery (or DVDs), when you can just have the blueprints (or digital files) sent to your computer at home?

With that kind of a future, it’s no wonder that 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) have been having monster years. Stratasys is up 102% year-to-date, and 3D Systems has risen a whopping 160% since January.

Too bad they’re both set up for a fall. Let me explain.

Real Advances… Overhyped

All the revolutions in healthcare and home manufacturing discussed above? That’s all coming – 3-D printing is truly a game-changing technology. In 20 years, we’ll wonder how we lived without it, much like looking back at the mostly internet-less world of 1992.

But it will take a little while yet.

The first affordable consumer 3-D printer, The Cube from 3D Systems, just came out in April. And, as exciting as that is, it’s still fairly limited. Today, 3D printers can only work with a few dozen materials. That number is growing exponentially, but it will still be some time before we can replicate anything we like. For now, we're mostly limited to various forms of plastic, with a few metals thrown in.

3-D printing also remains somewhat limited in what it can print out fully formed. It’s true – 3-D printers can make simple interlocking and moving pieces (think two linked rings, or a working piston). But it can’t yet print out complex moving parts (think an analog watch – or the circuitry of a digital one).

In other words, for the next few years, 3-D printing will remain a niche field, full of DIY lovers and those who like putting things together… but not yet a full-scale manufacturing empire.

There’s nothing wrong with that – except that 3-D stocks today are being priced like the future is already here.

Yes – 3-D printing is caught up in the dangerous part of the hype cycle.

 

<img src="/media/images/user_13420/hype-cycle-2011_large.jpg" />

This is a cycle noticed and defined by Gartner, to describe the usual adoption of a new technology into the world. Notice that expectations usually run amok before people realize how long it will actually take for a technology to be adopted.

As of last year, 3-D printing was just entering the Peak of Inflated Expectations. Considering what the stocks have done since the latest Hype Cycle was released, it’s safe to bet the technology has moved closer to the peak of those inflated expectations.

After all – 3D Systems is selling at a 65 P/E, and Stratasys is just above that at 66. 3D Systems just released its 2nd quarter numbers, and while the top line grew with increased revenue, the bottom line actually shrunk. Further, much of that top-line growth – up to half – was thanks to new purchases entering into the company’s revenue stream.

Now, don’t think this is bad news. 3-D printing is in the middle of a massive consolidation phase – one which has seen 3D Systems and Stratasys become, more or less, the only game in town.

And the future of 3-D printing remains bright. Just not so bright as to justify P/E margins in excess of 60.

Of course, the hype phase may not be over. There’s no telling how high valuations could get before some reality gets injected into the conversation. And, because both companies have such small caps, a big behemoth could easily swoop in and pay a premium for either company, figuring an overpayment today will easily be worth the prime position tomorrow. Already, companies like Apple (NASDAQ: AAPL) and Hewlett-Packard (NYSE: HPQ) have been rumored to be considering purchases of one of the big players.

Short a savior on that order, both 3D Systems and Stratasys seem primed for a fall. Who knows when it will come – if you own stock in either company, I’d hang on for now.

But tighten up those trailing stops. And, if you’re thinking of taking a position in 3-D printing, you’d likely be well served sitting on the sidelines until the Trough of Disillusionment kicks in. When it does, there will be plenty of bargains waiting for you.


Ryan Cole has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and 3D Systems and has the following options: short AUG 2012 $30.00 calls on 3D Systems and short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Amazon.com, 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.

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