We can see the future—make that futures–of 3D printing from here, but which future will it be?
You may have seen the video or heard of the stunt where a group called Defense Distributed fires a gun made from plastic using a second-hand 3D printer. From software instructions, the printer built up the gun from layer after layer of plastic. That has set off a firestorm of protest from people worried about the security implications of a plastic gun that anyone with access to a 3D printer and the software program initially distributed on the Internet can make and that doesn’t set off metal scanners. Support comes from people who believe that anyone should have the ability to make a gun or who see this as a logical extension of the Second Amendment right to bear arms.
But I think the focus on the use of a 3D printer to make a gun doesn’t recognize the truly disruptive economics of 3D printing technology.
Companies will be able to use 3D printers to make parts for complex and finely tuned industrial products, such as jet engines, that now need to be cast and machined and welded. Not someday—but today. General Electric (GE) has started using 3D printing to build fuel nozzles for jet engines. The process involves melting a bed of cobalt-chromium powder with lasers and then using 3D printers to build up the nozzle, thin layer by thin layer, following software instructions. Traditional manufacturing requires welding 20 small pieces together.
You will be able to walk into a Staples store and using 3D printers and software to build a prototype of a chair or a model of a building out of thin layers of paper glued one on top of another and then cut to the right shape by the printer following software instructions. Not someday but now. The first Staples store to offer the printer and software from private Mcor Technologies opened in the Netherlands in April.
You’ll be able to buy a home printer and create your own one-off Star Trek collectibles—not someday but now using software and printers from 3D Systems (DDD).
You—well, your dentist actually—will be able to create models of your choppers using 3D printers and software from Stratasys (SSYS)—not someday but now.
Auto companies will be able to use a 3D printer to prototype new engines and to produce components for high-pressure fuel injection systems using 3D printers and software from ExOne (XONE)—not someday but now.
But it’s not at all clear which one of those approaches to the 3D future will grab the biggest share of the 3D future—nor which one will lead in building a significant market nor which one will lag.
And that’s important to you as an investor because the three highest visibility publicly traded 3D printer companies are each emphasizing a different approach to the future.
Here’s my own survey of the landscape.
3D Systems (DDD): PE 91.7. Market cap $4.75 billion. Q1 revenue $102 million, 31% growth. GAAP earnings of 6 cents a share. 3D does make higher end printers for production, but I’d say the company is more heavily weighted toward the enthusiast and personal printer market than either Stratasys or ExOne. The company’s Cube 3D sells for characterize $1299 and its ProJet 1000 comes in at $4,000. (I’d call MakerBot and its Replicator series the purest enthusiast play, but the company is still private.)
The enthusiast and personal market is certainly an attractive one—it’s the part of the 3D printer market most likely to build the volumes that make Hewlett-Packard’s (HPQ) printer/ink strategy work so well. In 2011 $137 million of the 3D company’s $230 million in revenue came from the sale of printers and $93 million came from the sale of proprietary plastic and powders (the “ink” of the 3D printer.)
But the worry is that the personal market will be slow to develop. Very few individuals need to have a $1299 3D printer at home. The company’s very aggressive acquisition strategy—with 30 companies purchased since 2008—makes it hard to tell what the actual organic growth is in this end of the market. Recently 3D Systems sold stock to raise $250 million. The assumption is that the company has another, comparatively larger, acquisition in mind.
Stratasys (SSYS): PE 47.5. Market cap $3.5 billion. Q1 revenue $98 million. 2013 projected revenue $430 to $445 million. 2013 projected GAAP loss of 16 cents to 41 cents a share. I’d say that Stratasys emphasizes the professional market—although the company certainly sells its Fortus line of production systems. That emphasis got more pronounced with the merger of Stratasys and Objet.
For example, one of the products being pushed after the merger is the Objet 3 OrthoDesk, a 3D printer for the orthodontic market. An orthodontist will be able to create models of a patient’s teeth and then using the printer turn those into the specific dental applications that the patient needs. No more plaster molds that have turned into casts and than by hand into braces, bridges, replacement teeth, and other dental aids. The physical molds won’t have to be stored either so that they can be retrieved for future work for the same patient. Now the information contained in the physical mold can be stored digitally.
A joint venture between a 3D printer company like Stratasys and a 2D printer company like Hewlett-Packard would seem a natural. After all the established 2D printer company has the sales channels and customer support to push a product like the Objet 30—or Stratasys Idea line of personal printers—into the market place. The two companies thought so too—and they formed a partnership that would do exactly that.
But they relatively quickly dissolved that effort for reasons that to me seem unclear. Stratasys has said only that the effort didn’t work and the two companies agreed to part ways.
My suspicion—and that’s really all it is at this point—is that the two companies discovered that the early stage of development in the 3D printer market didn’t fit together all that well with the mature 2D printer market. No one needs to explain how a 2D printer works for a customer or to spend time convincing a business to make the leap of putting a 2D printer on a desktop. Yet that is exactly what the 3D market demands at this point—the potential 3D printer customer needs convincing and handholding and semi-customization of the product to business needs. Hewlett-Packards marketing apparatus is admirably suited to selling the mature 2D printer, but selling 3D printers would require significant retooling of that marketing force. The Hewlett-Packard association with a 3D printer would work to convince hesitant customers, but only if those customers had a satisfying rather than frustrating experience with the Hewlett-Packard sales and support teams.
The ExOne Company (XONE): Projected December 2013 PE 309. Market cap $546 million. Q1 revenue $7.9 million. GAAP loss 20 cents a share. ExOne is so newly public and so young as a company that it’s dangerous to draw conclusions about the company’s exact focus. (ExOne would probably not have been able to go public at such a early stage except that the stock market success of Stratasys and, especially 3D Systems, created investor demand for more opportunities to invest in 3D technology.)
But with that caveat, I’d say that the capabilities and higher unit price of the company’s printers indicate a focus on the industrial prototyping and production end of the market. The example that I cited at the beginning of this post—the use of a 3D printer to prototype new automobile engines and to produce components for high-pressure fuel injection systems—is indicative of the company’s market direction at this point in its life.
The very youth and immaturity of ExOne helps focus the key question about investing in 3D printer companies. Certainly 3D Systems has become a momentum-investing favorite on the basis: the stock’s 92 price to earnings ratio reflects that. But considering how speculative projections of future growth rates are and how uncertain the economics are—for example, How much money will these companies need to raise to build the sales force required to advance them from their current near R&D stage?—it’s hard to come up with a way to put a fundamental value on any of these companies or to pick one as having come up with the winning approach to the developing 3D printer market.
And then, of course, there’s the Chinese wildcard. The Chinese government and Chinese industry certainly aren’t blind to the future of 3D printing or its capacity to profoundly re-order the world’s manufacturing economy.
I think there’s ample evidence that China’s government has targeted 3D printing as a key future technology. For example, a Beijing University research team, working on 3D production for aircraft parts, won a national award from the State Council for Technological Achievement in January.
Given how important this technology is likely to be and the extreme difficulty in calling a winner at this stage, I think investors have two choices.
First, in the short-term you can simply trade these stocks as you would any hot momentum plays. Buy and sell as the short-term trend indicators suggest. This won’t give you a lasting or increasing exposure to the sector but you will stay on top of trends and to the degree that you aren’t a purely technical trader of these shares will gradually increase your familiarity with the companies in the still very early stage market.
Second, you could take a more long-term venture capital approach and put together a portfolio in the sector. Venture capitalists expect that of 10 bets they make some will simply not play out and may actually lose money; some will do no better than break even; some will result in a two to three fold return; and a very few will turn into a seven- or eight- or even ten-bagger. The keys to making this approach work are 1) even though you are building a portfolio, you still do due diligence and try to pick the best companies in the sector (given your understanding of the limits of your knowledge, 2) you make sure that your portfolio truly covers all the bases in the emerging sector—if the future surprisingly zigs, you’d like to own a piece of it, and 3) price matters—it’s a whole lot easier for a $500 million market cap stock to turn into a $5 billion market cap stock, than it is for a $10 billion market cap stock to go to $100 billion. To build my 3D portfolio now I’d like to include the three stocks in this post with an idea of buying some ExOne now and more later if the shares drop on the end of post IPO lockups that prevent selling by insiders and early round investors. I’d like to get 3D Systems cheaper than it is now—but I wouldn’t wait for it to get absolutely cheap. It and Stratasys are volatile and I think you’ll have plenty of drops for buying both.
And, of course, keep your eyes open for new entrants into the field that deserve a place in your sector portfolio.
Like most truly disruptive technologies the 3D printer story isn’t all sunshine and lollipops from a macro perspective.
First, the technology will eliminate high-paying manufacturing jobs. A company might indeed save money by using 3D printing technology to prototype and produce complex components but that will also result in the elimination of highly skilled practical engineering and production jobs. Long-term I don’t know if the new jobs created in software design, for example, will balance out the jobs lost, but it’s clear that the skilled workers that lose their jobs because of the adoption of this technology won’t be hired for the new jobs created by this technology. In other words, 3D printing technology will make the current jobs problem—where older workers in relatively highly paid and skilled jobs lose those jobs but don’t have skills required by newly created jobs—worse.
Second, 3D printer technology will make the inadequacies in the world’s apparatus for protecting intellectual property even worse. How do you protect a design when software engineers can turn it into code, and then either print the product themselves or put the code on the Internet for all to print? And when a “unique” product exists as code, then what exactly is the criteria for intellectual property that is eligible for protection?
The global economy never works out the solutions to problems like these before a disruptive technology is let loose on the world. And there’s no reason to think that we’ll do better this time.
3D printing is coming. It is the future. The big questions are What that future will look like? and How long will it take to arrive?
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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