The 3D printing market has created new ways of designing and making an object. In our previous article on 3D printing, "3D Systems: Why Bulls Would Love This Stock More," we focused on the industry's leading 3D print solution provider 3D Systems (DDD). As discussed earlier, the 3D printing market is dominated by two major players, 3D Systems and Stratasys (SSYS). To continue our coverage of the 3D printing market, we are taking a closer look at Stratasys's acquisition of Makerbot, and its plan to capitalize on market growth.
Perfect Timing of the Acquisition
Stratasys has been a major player in the 3D market, especially in its patented fused deposition modeling, or FDM, which is an additive manufacturing technology commonly used for modeling, prototyping, and production applications. The company has been prominent in the prototyping and direct digital manufacturing market, with industrial houses as its main customer segment. To mark its presence in the growing consumer segment, Stratasys acquired Makerbot for $403 million. Makerbot is the leading provider of desktop 3D printers for engineers, designers, architects, manufacturers, entrepreneurs, and individuals -- used for professional as well as for personal application. As per company report, around 40,000 Makerbot's desktop 3D printers were sold in 2012. This sales figure is expected to double this year because of popularity of these printers among consumers.
Post-acquisition, Makerbot launched its Desktop 3D scanner called Digitizer. This scanner is an important product launch in the 3D printing arena; it is user-friendly and doesn't require expertise in computer modeling. This revolutionary product will complete Makerbot's end-to-end 3D printing solution from scanning the object with Digitizer, uploading the designs to the company's online sharing design community called Thingiverse, and making the final object with the Makerbot Replicator 2 desktop 3D printer or another 3D printer. Is the Digitizer price justifiable? Well, looking at its user-friendly application and benefits, this price seems appropriate for this product. It is relatively cheaper than the price of professional 3D scanners that cost $10,000 per unit.
The Makerbot acquisition is an important initiative to capitalize on the current Maker movement trend, where individuals create products using unused, discarded, or broken electronic, plastic, silicon, or virtually any raw material from a computer-related device. As per Wohlers Report 2013, the low-cost personal 3D printer market grew at a rate of 46.3% year over year in 2012. Looking at the market potential, we believe this growth will be sustained in the future. Therefore, this acquisition will establish a platform for Stratasys to benefit from the personal 3D printer market. With the launch of its revolutionary 3D scanner, Makerbot is now expected to provide an end-to-end solution to its clients.
Stratasys has stiff competition from another major player in the market, 3D Systems, which has a wider range of products catering to high-end users and offers manufacturing to low-end users or consumers. 3D Systems has been known for its aggressive acquisition strategy in the 3D printing market. It uses acquisitions to expand its product line and presence in various regions. Keeping with its expansion strategy, the company recently acquired Sugar Labs and CRDM. Sugar Labs is a small design firm based in Los Angeles, Calif., that specializes in making customized sugar-based objects for food services, bakers, and chefs. These objects are made with the help of 3D Systems' Color Jet Printing technology, which prints sculptures for designing and making sugar objects, which can be used in the confectionery industry. 3D Systems will integrate this technique into their print product offerings.
CRDM is the U.K.'s leading 3D printer, rapid prototyping, and rapid tooling services provider, and it caters to automotive, aerospace, medical, and defense sectors. Rapid tooling is the process of making a customized part of a model using computer-aided designs. The company will integrate CRDM into its own Quickparts Solutions, which develops custom manufactured parts. This acquisition will help 3D Systems expand its footprint in the U.K., and CRDM's expertise will further help 3D Systems position itself in the growing direct digital manufacturing market.
The company has made 38 acquisitions since 2009, and with help of these acquisitions, it has been trying to enter every possible corner of the 3D printing market. These acquisitions have not only created revenue synergies but also contributed to R&D, expanding the company's product line.
Is 3D Printing an Uncontested Market Segment?
The 3D printing market has been among the most uncontested markets, with Stratasys and 3D Systems dominating in most of the market segments. This market is still Green Field space; there is still plenty of development left to happen with the emergence of small players. The market has been seeing lots of activity due to the growth in 3D printing. This activity includes Stratasys's recently closed public offering of more than 5 million ordinary shares, which pocketed net proceeds of $462 million. This offer received a good response from the investors, with underwriters exercising their overallotment option to purchase an additional 675,000 shares. This shows investors' confidence toward the company's future prospects and 3D printing market growth.
Potential in the market and investors' high expectations for 3D printing market growth has led Voxeljet, a Germany-based 3D printing company, to file for an IPO with the SEC for listing on NYSE under the ticker VJET. Although the company is small, with $11 million revenue for its fiscal year ending June 30, 2013, its investment in R&D and an accumulated portfolio of 170 U.S. and International patents should help it leverage the 3D printing market growth for increasing its top line. With its upcoming IPO, Voxeljet is expected to provide another investment option for investors who are betting on 3D printing market growth opportunity.
The acquisition of Makerbot will position Stratasys in direct competition with 3D Systems in the consumer segment. The company has been an important player in the industrial segment, but entry into the consumer segment will open new growth opportunities for Stratasys. The company has been trading at an expected upcoming five years' price/earnings to growth ratio of 1.75, as compared to 3D Systems' PEG ratio of 2.64. This denotes that the company is undervalued compared to its peers, and with the growth in the 3D printing market the company has upside potential. Stratasys had GAAP diluted EPS of -0.55, while its 12 months' forward P/E stands at 39.32, which denotes that the company is expected to increase its earnings in the next year. This stock will provide opportunity for investors who are betting on 3D printing market growth.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.