Recently we discussed one of the two spotlight technology industries of 2013, i.e. the solar industry. The other, being discussed here, is the additive manufacturing industry, otherwise known as the 3D printing industry. This industry experienced substantial growth during the last calendar year. Even though there was some negative sentiment in late 2013, the industry managed to end the year with solid gains. The most prominent 3D companies have shown a 93% average growth in their stocks. 3D Systems (NYSE:DDD) takes the lead by recording a 147% growth factor YTD. Voxeljet (NYSE:VJET) proved to be the most sluggish of the mainstream 3D printing companies amid Citron trashing its stock. Nonetheless, it managed to record a 36% increase since its initial public offering. Overall, the year 2013 was a positive year for the 3D industry in terms of investors spotlight and mainstream media attention.
The Year Ahead
The current expectations regarding the future of the 3D industry are positive. IDC estimates that 3D printer unit sales will increase at a CAGR of 59% and revenues will increase at a CAGR of 29% (2012-2017). The frequently referred (in the context of 3D printing) Wohler's report predicts the 3D industry to reach $6 billion by 2017; this is a CAGR of around 22% (2012-2017). In short, the industry is expected to grow by around 25% annually, which is a healthy growth rate going forward. Moreover, Gartner estimates a 75% growth in sub $100,000 printer shipments in 2014. It also expects the spending on 3D printing to increase by 62%, i.e. $669 million in 2014; of which around $536 million will be spent by enterprises and the remaining to be spent by consumers.
The graph depicts the growth of 3D printing materials in the coming years. These facts and estimates indicate that the AM industry is, indeed, growing and the recent hype about 3D printing is justified at some levels.
The demand for 3D printing is gaining popularity in several industries including aviation, dentistry and jewelry. Basically, 3D printers are suited to, and have the market opportunity for, the manufacturing of complex parts with low production volumes. Complex designs are not easily produced by using conventional manufacturing techniques. Hence, 3D printing is gaining traction in the above mentioned industries. There are several developments that support this argument. GE (NYSE:GE) and Rolls Royce will use 3D printing technology to manufacture jet engine components. A 3D gun has been printed and tested successfully. These developments supplement the fact that 3D printing is currently compatible with the printing of complex designs with low production volumes.
There is news that certain patents related to AM manufacturing are expiring in 2014. Patents related to Selective Laser Sintering (SLS) - a 3D Systems patent - are expiring in February 2014. This development will result in a flood of 3D printers in the consumer market. SLS is better than fused deposition modeling (FDM) in terms of finishing. A good quality finished printed object is far more attractive than just low quality novelty models that are printed by low end printers. China is also spending large amounts in 3D printing R&D. The expiry of patents will result in low cost Chinese printers which will affect the position of current 3D printing giants in the consumer segment.
There are several challenges faced by the industry, including build speed, build size and the cost of printing. Therefore, it is not an alternative to high volume production for now. Only time will tell whether 3D printing can be used as an alternative to the conventional manufacturing techniques. One good point that Terry Wohler raised in his interview to engineering.com is that 3D printing is not inherently better than conventional manufacturing techniques, as most of the people think. He said, "3D printing is a viable alternative in some cases but not for the most at the present time". This means that even if the speed of printing improves there are certain challenges that need to be addressed if 3D printing is to be used as a viable alternative for manufacturing. We believe that conventional manufacturing will not be replaced by 3D printing anytime in the near future.
- The expiry of patents will result in an increase in supply of low cost printers, aiding the growth of the industry but affecting the big guns.
- The most viable near future uses of 3D printing are in complex parts printing, equipment for casting purposes, prototyping and the consumer market.
- Double digit growth is expected in 2014, supported by a high revenue share of the industrial market. The consumer segment will see relatively higher growth than 2013 because of the patents expiry.
We will now analyze the notable 3D industry companies and their relative potential as an investment target.
3D Systems is involved in the production of industrial scale printers along with consumer oriented printers. The company also provides 3D printing materials and on-demand part printing services to its customers. The company has a market cap of around $9.46 billion and its valuations appreciated by a whopping 147% in the year 2013.
Both the revenue and the EPS have shown an impressive growth in 2013 and the company is consistently following a growing trend, in terms of revenue and EPS. 3D Systems is expected to post a revenue of $670 million and EPS of around 1.28 in the year 2014. This translates to an improvement of 29% and 32%, respectively, in revenue and EPS. The healthy growth of the industry makes it highly possible that 3D Systems will achieve or even surpass these estimates in the next year.
- The strategy of aggressive acquisitive growth seems to be paying off for 3D Systems. By acquiring the smaller companies, 3D Systems is enabling itself to be the dominant player in the market and will benefit from the growth prospects of the 3D printing industry. In our view, 3D Systems is making right acquisitions at the right time. The company's recent acquisition of Village Plastics and Figulo complements its consumer printing segment, which offers products like Cube. There are also hints that the company may be acquiring Voxeljet. This acquisition will further strengthen the company's position in the industrial segment, especially the printing of equipment for casting purposes which will bring further growth in the coming years. In our view, the acquisitive strategy of 3D Systems is its distinguished competitive strength in this growing industry.
- The company came up with a wide and improved range of printer offerings at EuroMold 2013. The prosumer oriented offering, i.e. ProJet® 1200 will be a key revenue driver in the coming year because, as mentioned earlier, 3D printers are more suited for complex designs. This printer is prosumer oriented and will be used by dentists, jewelers and electronic manufacturers. We believe this printer will prove to be a great success in the coming year along with its Stratasys rival (details are in Stratasys caption).
- The fact that Boeing and Lockheed are 3D Systems' customers, combined with Rolls Royce and GE's decision to print certain engine components, places 3D Systems in a unique position to capitalize on the aviation industry. Prototyping for Boeing and Lockheed exposed 3D Systems to aviation manufacturing and the company will be a preferable choice to other aviation customers.
The valuations of the company are quite high when compared to its growth prospects. Given the acquisitive strategy and certain competitive advantages, it seems that these valuations will not come down in the next year. Rather they will increase, but at a slower rate than the current year amid the expiry of certain 3D Systems patents.
Stratasys uses its FDM and PolyJet technology in its printers. The company offers a wide range of printers for its customers, ranging from consumers to industrial clients. The acquisition of Objet enabled Stratasys to compete in the prosumer market as Objet's printers are getting traction in dentistry. On the other hand, its MakerBot subsidiary is consumer focused and is operating actively to gain consumer attention. The company has a market cap of around $6.29 billion and its shares appreciated by around 73% in the YTD.
The company is showing consistent growth and its revenue is expected to reach $651 million in 2014. The EPS is also expected to improve to 2.38. The point to note here is that the EPS of Stratasys is expected to be greater than the EPS of 3D Systems, despite the revenue of 3D Systems being higher. This indicates a better cost management structure at Stratasys.
- Like 3D Systems, Stratasys is also following an aggressive acquisitive strategy. This consolidation will strengthen the foothold of both these companies in the market. In our view, the main strength of Stratasys comes from the acquisition of Objet, i.e. a focus on printers for professionals like dentists and jewelers. The Objet series will support revenue growth in 2014 and onwards. Especially the Objet30 OrthoDesk has the potential of gaining traction in the field of dentistry. On the other hand, the consumer segment subsidiary, MakerBot is also expected to be a source of growth. MakerBot's strong Ecosystem makes it a strong competitor in the consumer market.
- The expansion of the company's geographical footprint is also a competitive strength and will increase future revenues. Recent acquisition of certain assets of Sysopt will enable the company to capitalize on the growth potential of the Korean market.
These competitive strengths of Stratasys indicate that it will be able to capitalize on the growth of 3D printing. However, it is more exposed to the threats from patent expiry as it is more oriented towards consumer printing than 3D Systems. In the industrial segment, 3D Systems has a stronger position than Stratasys. The company will spur its growth primarily through the Objet series of printers.
The Friedberg based German company experienced a decline in valuations after certain reports by short sellers trashing the company. Furthermore, the doubts regarding the 3D printing industry in late 2013 impacted the valuation of this company the most. Voxeljet manufactures and markets industrial scale 3D printers, with some distinguishing features. It is a relatively small company with a market cap of around $379 million. Its valuations have grown by 36% since its IPO.
Voxeljet's revenue and EPS are expected to grow in the coming years. Revenue is expected to be around $24 million in 2014 and EPS is expected to be $0.10. Both these figures are very low when compared to Stratasys and 3D Systems but there are certain things about this stock which makes it worth mentioning along the bigger stocks of the 3D printing industry.
- The printers offered by Voxeljet have a large build space which impacts their printing speed. The speed is one of the many challenges currently faced by the 3D printing industry. To have a speed advantage is a vital competitive strength.
- The company is different from other 3D printing companies because it generates almost equal revenues from printer sales and on-demand printing services. No other company in the industry is currently able to do that. The primary reason, in our view, are the silicon based capabilities of the company. The silicon based materials complement the production of casting equipment and, hence, Voxeljet is able to generate healthy revenues from on-demand casting equipment projects.
- The company was also involved in the printing of automobile models for the film industry. This unique experience exposes the company to potential growth opportunities in the automobile and movie making industries.
- The attractive nature of the company as a potential acquisition target is also a strength because the acquisition by 3D Systems (if it goes through) will further bring synergic benefits, expertise and financial backing of 3D Systems which will result in the expansion of global footprint of the whole group.
In our view, Voxeljet is a good investment because of its mould and casting parts printing business, the build speed and space of its printers and the fact that it is an attractive acquisition target for 3D Systems.
The 3D printing industry's hype is justified at some levels and it is expected to grow in the near future. This growth will be supported by prototyping, casting equipment manufacturing, complex part printing and, to a smaller degree, consumer printing. The mass level manufacturing of products using 3D printers in not expected in the near future, unless a revolutionary technology breaks out. 3D Systems is poised for future growth in the industrial segment because of its attractive offerings. It also has good products in the prosumer and consumer markets. Stratasys' growth will mainly be supported by its performance in the prosumer and consumer markets. Voxeljet, despite its smaller size, has growth prospects in casting, automotive and film industries. However, the pick of these stocks is 3D Systems because of its leading position in the industrial segment; while is still maintains a competition in the other segments as well. Stratasys is more exposed to the risk of flooding of cheap printers in the consumer market. The only reason we do not suggest Stratasys is because of the patent expiry and its potential impact on the consumer market. If MakerBot suffers, Stratasys will definitely decline in terms of valuations. Voxeljet is small, but is immune from consumer market threats while 3D Systems can sustain any consumer segment losses because of its strong industrial presence.
We believe Volxeljet and 3D Systems are the best growth bets in 3D printing for the coming year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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. Equity Flux is a team of analysts. This article was written by our Technology analyst. 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.