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An Investor’s Guide to 3-D Printing

By Chad Fraser on June 11, 2013

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“These [3-D printers] are the sewing machines of today.” 

—Etsy CEO Chad Dickerson

3-D printers—or devices that allow users to create a useable item from a digital file—have been around for roughly 25 years.

However, the machines’ high costs, as well as the complexity of the computer-aided design (CAD) software required to use them, have largely kept them in the domain of engineers and designers. These borders are now breaking down, as Jim Fink, chief investment strategist for our Roadrunner Stocks newsletter, wrote in a March article:

“Consumer uses have been limited so far because of cost (up to $20,000 per printer), and the resolution of cheap 3-D printers hasn’t been good for anything but cheap plastic knick-knacks like figurines, cellphone covers, bracelets, and puzzles. Slow completion speeds of several hours are also a concern. But this is changing quickly as consumer 3-D printer costs decline below $1,000 and quality improves.”

Desktop Factories on the Way?

Aside from customization, the appeal of 3-D printing comes from greater efficiency and lower costs for certain types of projects, as Fink explains:

“3-D printing is also called ‘additive’ manufacturing because it only uses the material needed to make the object. That’s the exact opposite of traditional ‘subtractive’ manufacturing, which makes objects by removing material via cutting and drilling.

“The problem with this subtractive technique is that it wastes 90% of the material used in the effort to make the desired object,” he added. “The cost savings from using 90% less material makes 3-D printing not only greener from an environmental and conservation perspective, but also much more affordable for small, custom-made projects that would be cost-prohibitive if done via traditional manufacturing equipment.”

Fink describes 3-D printers as replicators from Star Trek, “only a little less cool.” The devices work by pushing materials, such as melted plastic resin or metallic powder, through a print head to build up the specified object in layers.

In that way, the device works a lot like an everyday 2-D home printer. However, we’re still a long way away from having the power to swiftly print off anything we want, anytime, right in our living rooms. Deloitte recently published a market analysis of the industry that highlighted a number of areas where “printed” goods still fall short of their mass-produced counterparts. Here are three:

  • Quality can be lacking: Some products derive essential characteristics from the way in which they’re made, which is something a 3-D printer can’t replicate. “For example,” says Deloitte, “a printed wrench, while functional, will simply not last as long as one produced through drop forging, which can potentially survive generations of hard use.”
  • 3-D printing remains unsuitable for complex objects: 3-D printers work well with objects that are made from just a few materials or better yet, a single material (such as Fink’s aforementioned puzzles and knick-knacks) but are very limited for more complicated projects: “This means that printing items requiring multiple materials, such as a running shoe, is not possible without substantial increases in complexity.”
  • Mass production still rules on cost: Economies of scale still favor traditional methods when large numbers of a product must be produced. “In this way, 3-D printing is a lot like paper printing,” writes Deloitte. “Making 50 copies on a printer or photocopier is economical and reasonable, but making a thousand copies shifts the advantage to an offset press.”

Despite these challenges, the industry looks set for continued growth, according to Deloitte, particularly for making specific parts in industries like medicine, aerospace, car and appliance repair. 3-D printers also have strong potential for hobbyists, crafters, and artists.

“Rather than having to stock rarely used replacement parts or make customers wait for ordered parts, the required parts could be printed on demand. In this scenario, it is not unreasonable to envision a 3-D printer in a technician’s vehicle or garage allowing him to print parts as needed,” says Deloitte.

According to December 2012 figures from consumer research firm IBISWorld, the 3-D printing industry has grown at a 10.2% annual rate from 2008 to 2013 and generated $2 billion of revenue last year. A recent Forbes article forecasts industry revenues of $3.1 billion by 2016 and $5.2 billion by 2020.

Two 3-D Printing Stocks to Watch

Stratasys and 3D Systems are two leaders in the 3-D printing space. Here’s a look at both, including their first quarter performance:

3D Systems (NYSE: DDD) sells consumer and professional 3-D printers, as well as print materials and services. In the first quarter, 3-D printers and related products accounted for 39% of the company’s revenue, 28% came from print materials, and services provided the remaining 33%.

During the quarter, 3D Systems’ revenue rose 31.0%, to $102.1 million from $77.9 million a year ago. Organic sales (including the effects of takeovers and other external sources) rose 22.1%. Printer sales volumes jumped 81%, pushing up revenue from printers and other products by 60.7%, to $39.7 million. Print materials revenue rose 16.7%, to $28.7 million, and services revenue gained 17.9%, to $33.6 million.

Earnings declined to $0.06 a share from $0.08 (accounting for a 3-for-2 stock split on February 25). On an adjusted basis, earnings rose to $0.21 a share from $0.17. That met the consensus forecast, while revenue was ahead of the $101.6 million that analysts were expecting.

The company increased its gross margin to a record 52.4% from 49.9% a year ago.

On May 3, Staples (NasdaqGS: SPLS) announced that it will offer 3D Systems’ Cube personal 3-D printer in select Staples outlets starting at the end of June. The device, which will sell for $1,300, connects to your PC through Wi-Fi and can print objects up to 5.5” x 5.5” x 5.5”. Staples will also sell printing cartridges in 16 colors.

The stock has risen 126.6% in the last 12 months, reflecting strong investor interest in 3-D printing. 3D Systems trades at 102.4 times its latest 12 months of earnings.

Stratasys (NasdaqGS: SSYS) makes 3-D printers that are mainly aimed at professionals. The company merged with privately held Objet Ltd. in December 2012. The combined company began trading on the Nasdaq exchange under the SSYS symbol on December 3.

Designers use Stratasys’s systems to create prototypes of their projects, as well as finished goods in smaller numbers. The company is based in Minneapolis and Israel.

According to technology blog TechCrunch, Stratasys is in discussions with privately held MakerBot Industries about a potential acquisition. MakerBot produces the Replicator line of 3-D desktop printers, which are aimed at consumers and start around $1,999.

Such a purchase would move Stratasys into more direct competition with 3D Systems. It would also come less than a year after the end of an unsuccessful joint venture between Stratasys and Hewlett-Packard (NYSE: HPQ).

Meanwhile, Stratasys’s first quarter revenue rose to $97.2 million from $45.0 million a year ago. Unlike 3D Systems, Stratasys gets the vast majority of its sales (84%) from sales of products.

The company lost $0.40 a share in the latest quarter, down from a profit of $0.21 a year ago. On an adjusted basis, earnings per share rose to $0.43 from a pro forma profit of $0.32. That topped the consensus forecast, though revenue missed the $98.3 million that Wall Street was expecting. Gross margins declined to 38.4% from a pro forma 43.6% in the same quarter a year ago, though adjusted gross margins came in at 59%, up from a pro forma adjusted 56.7%.

Stratasys shares are up 24.8% since it completed its merger with Objet.

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