Once we get our head around what 3D printing is, it is hard to escape the feeling that it is the next big thing. For once, I’m not being sarcastic here. I don’t mean the next big thing in the One Direction or Palm Pilot sense; more like the next big thing in the sense of something that could change all of our lives in fundamental ways. The technology has the potential to revolutionize manufacturing and the way we acquire things, and makes several dreams of science fiction seem remarkably prescient. The future for the industry is rosy, but at current valuations it is hard to get too enthusiastic about the most popular stocks in the sector.
For those who are unaware, 3D printing is a technology that allows the user to “print” physical objects, using materials such as plastics, metals and paper. They are not completely new as the first one was built by 3D Systems (DDD) in 1984, but like most technology, applications for the basic technique have increased as the hardware needed has become smaller and cheaper. What separates it from traditional manufacturing is that rather than being “subtractive” (cutting and molding shapes from sheets or blocks of a substance) 3D printing is “additive” (layering material in different shapes to build something from scratch).
There is controversy surrounding the industry already. The potential for making guns, for example, is worrying in itself and doubly so when you consider the possibility of making them out of non-metallic substances and therefore “invisible” to current safety checks. The prospect of similar techniques being used with organic cells conjures up an image of a sci-fi world where people are built rather than made in more traditional ways, and there will undoubtedly be issues ahead that we haven’t even considered yet.
These and other concerns are valid, but from an investor’s perspective, one must make the assumption that we, as a society, will arrive at limits and solutions to those issues that are acceptable. The more pressing questions are the more mundane ones…Does the sector have commercial viability? If so, which companies will prosper? Is the sector overbought right now?
The answers are, in order, yes, some and maybe. Commercial viability is not a prediction, it is a fact. Market leaders DDD and Stratasys (SSYS) already make money. Their focus for now is on supplying industry with the machinery and technology of 3D printing, and there is significant demand. The interest for investors is as to who will crack the mass consumer market first. That is almost impossible to predict and the big players in that market may well not exist yet. IBM, however, shows that a solid company can be built by providing businesses with new technology first and then the transition to the consumer market can be made from a position of strength.
To answer the second question, which companies will prosper, it is hard to get past those big two, DDD and SSYS in terms of specialized companies. The fact that they are both profitable and growing fast gives them a degree of protection from more recent entrants to the market. The biggest danger to them may come, not from an upstart startup, but from old, lumbering giants. Hewlett-Packard (HPQ) and Microsoft (MSFT) have both recently entered the space and their presence in the market will undoubtedly cause some disruption.
That development also weighs heavily on the third question, are stocks in the sector overbought?
Both have had good years. DDD is up 218% and SSYS is +102% in the last 12 months and with forward P/Es of around 64 for DDD and 58 for SSYS there is obviously an expectation of significant growth. The stock performance of another company in the sector, ExOne (XONE), though, serves as a warning of how quickly things can change when expectations aren’t met.
The stock lost 25% following August’s earnings release, when a year on year revenue increase of 240% was deemed disappointing, showing the weight of expectations these companies carry. There are of course other problems with XONE, mainly that the company is not profitable, but the steepness of the drop indicates the dangers when overblown expectations aren’t met.
3D printing is an industry with ridiculous potential. The problem I have with the two leading stocks in the sector, DDD and SSYS is that most, if not all of that potential is priced in, just as the market is beginning to be disrupted by the big boys jumping on the bandwagon. If you have a 50 year investment horizon and an unlimited capacity for short term losses, then buying into every established and emerging company in the 3D printing sector makes sense. For those of us without that luxury, however, some caution is advised at this stage in the game and at these levels.