Printing Up Profits
Chad 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 quite a lot written about the relatively new industry that is 3-D printing. Two of the main players in this field are Stratasys (NASDAQ: SSYS) and 3D Systems (NYSE: DDD). With headlines on Fool.com like “Does 3-D Printing Have A Future In Your Home?” and “3 Things To Watch With 3-D Printing Stocks,” you can tell there is a lot of excitement over the industry. Call me old fashioned if you like, but anytime an industry is dubbed as a “game changer” or a “transformational technology” I get a little worried.
For those who aren't aware, 3-D printing is exactly what you might imagine. A printer that can be as small as a few square feet to something that you need a crane to move can be used by anyone. The operator usually needs specific software to create an item, but once the item is designed on the software, the printer places layers of material together to create whatever is desired.
Assuming the industry evolves and printers are made that use many different materials, you could print whatever you wanted. This technology isn't out of a normal person's price range either; if you do a search online for 3-D printing you'll find some companies willing to sell you a 3-D printer for less than $2,000. While these smaller printers are limited in what they can create by size and number of materials, there are million-dollar printers that can create very complicated items as well. 3-D printing has been heralded as the way for the United States to take back manufacturing from overseas firms. It sounds good in theory, but can it happen?
Not For Home Use
There are a few challenges that I see for 3-D printing to become a mainstream solution. Realistically, as Alex Planes from The Motley Fool says, 3-D printing won't have a place in people's homes anytime soon—if ever. The problem is the cost of the machine and what it can make. There is a reason that people still order magazines and newspapers even though it’s been possible to print these items right from home: it's not cost effective.
Whether we are talking 2-D or 3-D, at some point a company with a million-dollar machine can produce items cheaper than you or I can at home. For me to print a simple magazine of 50 pages would cost paper, ink, and time. If I can go buy the same thing already bound for a few bucks, why would I waste my time and money? What applies in 2-D probably makes sense in 3-D. Companies could install 3-D printers and create items with these machines much more cost effectively than you or I could at home.
Supplies Will Be Commoditized
The second issue for 3-D printing is the materials used today are primarily plastics and metals that can be manipulated into a different form. It's one thing to use ABS plastic to create a toy, but it's entirely something else to have a 3-D printer create an item out of metal, concrete, or other materials. In addition, 3-D printing companies will need to make sure the materials are affordable enough to make sense.
For example Objet, which is being acquired by Stratasys, reportedly has over 100 proprietary materials. This is great news for Stratasys shareholders if these materials are made widely available at reasonable prices, but terrible news if the company tries to make these materials into the razor blade of this business. It's very likely that over time the materials used will become commoditized, which means that 3-D printing companies will need to make money on the printer and rely less on the materials involved. Using the 2-D printing world as an example, you can buy Hewlett-Packard ink, but you can also find generic ink cartridges easily enough as well.
Here Comes A Flood Of Competition
A third issue for 3-D printing is as that as the industry becomes larger, it's nearly certain that Stratasys and 3D Systems are going to get a lot of competition. Think about the last few “next big things.” When PCs were growing by leaps and bounds, many companies jumped into the field. Today even the largest PC companies have trouble making money. When Apple first produced the iPhone, people drooled over it and the company sold millions. Today companies like Samsung, LG, HTC, Motorola, and many others make smartphones that have similar capabilities to the iPhone. More competition means lower prices for consumers, but it also means lower margins for the company.
The good news for investors in either Stratasys or 3D Systems is, unlike the producers of some “next big things” of yesteryear, these companies actually make money. I remember hearing how companies in the dotcom bubble were going to make billions by using the Internet to drive sales. Many of these companies disappeared completely, as they never found a way to actually make money.
By contrast, Stratasys generated $1.2 million in free cash flow in its most recent quarter, and 3D Systems generated $4.75 million in the same timeframe. Both companies sell for relatively high multiples, at 31 and 40 times earnings for 3D Systems and Stratasys, respectively. Analysts expect good but not spectacular growth, as each company is expected to grow earnings by 14% to 15% over the next few years.
These companies are at the forefront of this potentially transformative technology. However, there are serious risks to each company's long-term dominance. Though not for the faint of heart, if either company can continue to dominate their field, investors might be able to print their own profits.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems and has the following options: short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems 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.