While working at aninvestment magazine back in the 1990s, I
profiled a young technology company with a very intriguing
product. This company had a smallsales base and struggled to make
profits, but its device, which could create fully formed objects
in a microwave oven-size device, was right out of Star Trek.
Stratasys (Nasdaq: SSYS)
was an early pioneer in the field of "rapid prototyping" -- or
what's now known as 3-D printing. (Some also nowcall this the
"additive manufacturing"market .) Stratasys, along with rivals
3D Systems (
ExOne (Nasdaq: XONE)
are no longer a well-kept secret. The first twostocks have risen
more than 350% over the past two years, and XONE has doubled in
value since its early 2013IPO .
Clearly, the market for these companies' devices is starting
to take off. Stratasys boosted sales more than 30% in 2011 and
2012, its best growth rates since 2004. 3D Systems has boosted
growth at an even more impressive 45% clip over the past three
years. And all three are expected to boost sales at least 40%
The outlook ahead is also quite bright, as new applications
are emerging in the automotive, health care, aerospace and
consumer markets.Credit Suisse estimates the industry had roughly
$2 billion in sales last year and sees that figure rising to $5
billion by 2016, or a 24%compound annual growth rate. The fact
that these stocks trade for at least 35 times projected 2014
profits (and 88 times in the case of XONE) might almost seem
justifiable. Investors are paying up now for expected highprofit
levels down the road.
Yet even as investors bid these stocks ever higher, they may
be missing some key speed bumps in the road ahead. It starts with
acquired a pair ofprivately held 3-D printing firms, Morris
Technologies and Rapid Quality Manufacturing. Although GE hasn't
made a big industry push this year interms of contract wins, the
company has been bolstering its presence at industry trade shows,
leading some to expect a bigger competitive push in 2014.
Transforming powdered metal into finished metal parts is
expected to be one of the biggest growth areas for the industry,
and Sweden-based Arcam appears to have the industry's strongest
capabilities in this niche. Arcam noted a big jump in orders
andbacklog when six-month results were released in August,
leading to expectations of 60% to 65%revenue growth. Competition
is also emerging from a handful of other privately held firms
that includes EnvisionTEC, Eos and Micor.
The outlook ahead is quite bright, as new
applications are emerging in the automotive, health care,
aerospace and consumer markets.
On the consumer side, known as desktop printers, Formlabs,
Printrbot, Leapfrog (not the toy company), RoBo 3D and Solidoodle
are all ramping up sales efforts.
The problem with competition is that it tends to lead to more
aggressive pricing strategies across the industry. And thatwill
make it harder for 3D Systems and Stratasys to maintain gross
margins above 50%, as they did in 2012.
Also, a fast-growing industry means that many of these
privately held rivals may soon look to go public (investment
bankers likely see them as easy deals to get done in light of the
strong investor interest). Once a flurry of new companies goes
public in an industry, they use their IPOfunds to speed up new
product development and expand marketing efforts. So Stratasys,
3D Systems and XONE may be in a golden moment -- but, from a
competitive perspective, one that may not last.
Analysts at Credit Suisse arebearish on the prospects for
XONE, as they believe that company has a weaker productoffering
and too shallow an industry presence. These analysts are
morebullish on the outlook for 3D Systems, with a $62price target
that is 15% above current levels. (The neutralrating on Stratasys
reflects a lush valuation for thatstock .)
Yet these analysts, in a recent comprehensive industry report,
failed to takenote of some potentialred flags that investors
should be aware of regarding industry darling 3D Systems.
For starters, the company's organic growth rate is alot less
impressive than you'd imagine. Since September 2011, DDD has made
16 acquisitions, which is more than the rest of the industry
combined. Fully one-third of the company's organic growth rate in
the most recent quarter came from acquisitions, and analysts see
organic growth slowing to 15% to 20% next year. (Deals completed
thus far in 2013 explain the total projected growth rate of 24%
All of those acquisitions have pumped upgoodwill , and 3D
Systems carries just $410 million in tangiblebook value . That's
less than the company has raised in itsmultiple secondary
offerings over the past half-decade, meaningbalance sheet value
creation has been nil.
Also of concern: 3D Systems'accounts receivable spiked $18
million in the second quarter to nearly $120 million. That has
raised concerns that the company is stuffing the sales channel in
order to meet high quarterly sales targets thatWall Street is
anticipating. Lastly, a drop in six-monthcash flow (from $21
million in 2012 to $12 million in 2013) is disconcerting,
especially when statednet income for the first six months of 2013
was $34 million.
Risks to Consider:
As anupside risk, both SSYS and DDD have the broadest product
offerings in the industry, which makes them viableacquisition
candidates to a large manufacturer that wants to enter this
Action to Take -->
Although all three of these stocks sport very lofty valuations,
3D Systems appears to be the riskiest stock here, due to balance
sheet and cash flow concerns. Fully 29% of this stock'sfloat is
held by short sellers, reflecting the mounting concerns around
this seemingly impressivegrowth company .
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