Introduction To 3D Printing Stocks: Wave Of The Future Or Wave Of Hype?

Includes: DDD, SSYS, XONE
by: Mike the PhD

There has been a lot of talk about 3D printers in the last few years, and they have attracted so much attention that they even garnered a mention during the State of the Union address earlier this year. There are three publicly traded companies that manufacture 3D printers today, and in this article, I briefly discuss each of the three and what potential each stock has going forward.

First, for those who aren't familiar with the technology, 3D printing basically involves a machine taking tiny beads of plastic or metal, and then melting them and "spraying" the material in very fine layers to create a 3-dimensional shape. (In some cases, more exotic materials are used in medical applications.) The idea here is that rather than starting with a block of material and then removing part of the material via machining until the desired shape is achieved, the machine "builds" the object in the desired shape from the start. It's almost like a form of Lego's, the popular children's building blocks, but for industry.

So why is 3D printing such a big deal? Well, a lot of industries need various complex shapes for use in one application or another. The best example I am aware of is manufacturing helicopters. Helicopters need a series of complex gears for use in their rotors. Traditionally these gears have been manufactured by starting with a larger piece of metal, and then machining the piece into the desired shape. This is a long tedious process in part because if any mistakes were made, or the machining was done improperly, then it could weaken the structural integrity of the metal making up the gear, and the process had to be started all over again. In the last few years, the Department of Defense has started taking a very close look at using 3D printing to make these gears rather than traditional machining. This is just one example though, and there are lots of others out there. Basically any complex geometric shape is a candidate for use with 3D printers.

The three publicly traded firms that are most connected to 3D printing are 3D Systems (NYSE:DDD), Stratasys (NASDAQ:SSYS) and Exone (NASDAQ:XONE). and are roughly the same size by Market Cap (though this varies rapidly of course), while is a smaller firm with a market cap around $400 million.

Stratasys has operating income of $29.1mm on revenues of $215mm, and has a 3 year sales growth rate of about 30% according to Standard and Poor's. So the good news is the firm is profitable, and it is growing very quickly. The bad news unfortunately is that it is very expensive (PE ratio of about 150), and the firm just completed a merger in December, so there is some integration risk going forward. The stock is also extremely volatile having ranged from $34-$92 per share over the last year. That said, historically, various academic research papers have concluded that a stock like (SYSS), which is in the bottom 40% of all stocks by market cap, the top 20% by PE ratio and momentum, on average will outperform the market over time. Stocks having these characteristics, and operating in expanding sub-industries like 3D printing, on average return about 8% more than the market annually (19% vs. 11% over the last 50 years) historically, but they also have a higher probability of declining than the market as a whole (52% probability vs. 47% probability for the market). See my blog and past articles for more details on these return and decline calculations.

3D Systems is similar to Stratasys in a lot of ways. They both focus on manufacturing smaller 3D printers and getting the price of the printers down as low as possible. Both firms have been publicly traded for years now, so they have a track record, and both have generally been profitable for several years now. 3D had operating income of $85.5mm on revenues of $354mm last year, and it has a three years sales growth rate of 46%. Again however it is an expensive stock with a PE ratio of about 65, and a 52 week range of $15-$48. One primary reason for the lower valuation is that 3D Systems disappointed in the latest quarter with revenue numbers that many analysts found disappointing. While 3D systems is similar to Stratasys in most respects, given its disappointing quarter, investors can expect an average of -5% underperformance for the next few months (the mean 3 month returns to stocks that miss on earnings), and there is a 12% greater probability that will miss again next quarter than if it had not missed this quarter (58% probability vs. 46% probability for all stocks). However, over the longer run, returns are higher if investors buy following earnings disappointments, so for those investors willing to take on a longer term approach, 3D Systems may be an attractive play.

Finally, ExOne is the smallest stock in the group and the one to most recently go public. It did its IPO earlier this year and has risen dramatically since that time (price range of $23-$34). Exone focuses on extremely expensive 3D printers primarily for industrial clients (like the helicopter example above). Because the firm has so little public history, there is very little to say about its past earnings performance, but it is useful to consider what has happened to IPOs historically. Almost universally, IPOs rise on their first day of trading. (That's what made Facebook (NASDAQ:FB) such an unusual case.) However, over the ensuing 12 months, IPOs generally underperform comparable peers in the market (based on the four factor model I have discussed in a past article). The only IPOs that tend to outperform their peers over the next 12 months, are those that report stellar earnings in their first two quarters as public firms. As a result, for investors in ExOne, the upcoming earnings report on March 27th takes on added importance. If the firm looks good and performs well, then on average the stock is likely to outperform peers for the next year. If they only meet numbers however, they are likely to underperform for the next few months. However working on the firm's side is the fact that it is a small cap company, and these have historically outperformed as well.

Bottom Line: The bull case for these stocks is that 3D printing is definitely a growth industry. 3D printing is a useful technology, it is getting more useful every year as innovations in the field are developed, and all three of the stocks mentioned here do have real and growing revenues and profits. The bear case for the stocks hinges on how expensive the stocks are, and whether or not these firms will grow quickly enough to justify their valuations. Historically, stocks in "growth" industries have outperformed the market over time, but they also carry substantially more risk (greater kurtosis in returns) than the broader market.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DDD, XONE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.