David Eller writes: It’s rare these days to get in on the ground floor level of an investable trend in technology.
It seems like most of the big technological leaps have already taken place. Whether it’s something as dramatic as a smartphone or as subtly useful as paid search, these huge ideas don’t come around often.
That said, 3D printing may be the next game changer in technology. The industry has been around for a while and the stocks had a great run in 2012.
But we’ve seen a pullback since the Consumer Electronics Show in January, which coincided with the peak. I’m excited about the industry for three reasons:
•The possible emergence of the dental market.
•Falling prices for “prosumer” printers.
•Recent acquisitions offering padding to the upcoming quarter. Additionally, now that we’ve had a pullback, forward valuations for the two premier companies are reasonable.
A Quick Overview
Printing in three dimensions is essentially just layering material. A printer deposits a layer of plastic 28 microns thick (about a third the thickness of a human hair) in the shape of an object’s silhouette, and then adds additional layers until a custom part is formed.
The business case for this today lies in the hands of enabling industrial engineers to do three things:
•Develop proofs of concepts.
•Build production parts.
It’s simply much cheaper, faster and more accurate to print your own part than it is to build a sand-cast model and have it sent out for fabrication.
Any design, production, or engineering company would be a potential customer today. NASA, for instance, used 3D prototyping for 60 to 80 parts on its new lunar rover. These are not necessarily final parts, but a plastic part will initially be printed up in a few hours, tested and modified before eventually being fabricated using the perfect materials. In some cases, clients will even use these parts in production. Diebold (NYSE: DBD) has used fabricated parts in production testing versions of their ATMs.
Whether it’s a plastic casting of the next version of Citi Field or a door handle on the next BMW (OTC: BAMXY), it’s cheaper and faster to build internally using 3D printing.
There’s Still Plenty of Room to Grow
Today, there are 40 million active licenses of Computer Aided Design software, but only 50,000 3D printers in production. There will never be a 1:1 comparison. However, if it could be 50:1, the opportunity is 16 times larger than the current market size.
Future verticals offer new opportunities that aren’t in analysts’ models. Without getting too far ahead of ourselves, consider the dental market.
Imagine going to the dentist with a broken tooth. The technology is becoming available right now to print a ceramic crown – inside the dental practice. This would save days, if not weeks, of walking around with a temporary filling. From the perspective of the industrial 3D printers, the only difference is the base material used for fabrication.
Stratasys (Nasdaq: SSYS) is the leading industrial vendor. The company developed a name for itself using a technology called Fused Deposition Modeling (FDM).
FDM allows clients to produce parts that are closest to production materials in terms of strength, flexibility and weather resistance. By taking the lead in materials, Stratasys has built a tier-one customer list including Bell Helicopter, Ducati, Dana Holding Corporation (NYSE: DAN), Piper Aircraft and Medtronic (NYSE: MDT).
Building on its lead in materials, Stratasys recently merged with Objet, which is developing the first multi-material printing solution. Investment positives for Stratasys include a top-notch customer list, expertise in a wide variety of materials and expansion into the dental industry.
3D Systems Corp. (NYSE: DDD) has an edge in design and distribution. The company has more patents than employees with 1,200 filed. Plus it offers full-color printing capability. The ability to manipulate color should give DDD a significant edge in the home market, as well as the lowest price point at $1,300.
From an investment standpoint though, I like SSYS better. The problem with DDD, as I see it, is the increasing competition for the consumer market. Also, the CEO recently sold 500,000 shares. That was more than half of his holdings. Although there are many harmless reasons insiders sell stock, so many shares could be a warning sign.
The Razor/Blade Model
After numerous recent acquisitions, the two companies look alike in terms of revenue and market cap. But as the market develops, there will be an important profit shift from machines to consumables. Each company is selling the consumable materials used in the printers, which could represent the greater of the profit opportunities. It’s similar to the razor/blade model.
It’s early and there’s no clear winner quite yet. But I believe Stratasys will be able to scale down to the consumer market in time.
* growth rates are not meaningful since both are digesting large acquisitions
Both stocks were high flyers, but pulled back after year’s end. Stratasys dropped 22% from its $90 peak while 3D Systems fell 27% from its high near $46.50.
From a valuation perspective, neither stock is very expensive if you trust consensus earnings estimates for 2013. Stratasys, however, recently released a printer specifically designed for the small-office dental market and simply continues to execute on its core opportunities.
It would normally make sense to simply buy a half position in both companies and let the industry sort it out. However, the recent management share sale at 3D Systems makes me want to take a wait-and-see approach for now.
by David Eller,
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