The potential for the 3-D printing industry seems extraordinary. The possibilities seem endless, as it could change how products are distributed and manufactured. The excitement has led to some very big gains for companies in this sector, many of which are no longer cheap. This has led some investors to wonder if there are any ways to play this booming sector and still pay a somewhat reasonable valuation.
3D Systems Corp. (DDD) shares have surged in the past several months and now trade for nearly triple the 52-week low of about $28. Analysts expect it to earn around $1.27 per share in 2014, which puts the price to earnings ratio at about 60 times. This company has a market capitalization of roughly $8 billion and about $460 million in revenues.
Another leader in this sector is Stratasys Ltd. (SSYS), which has a market capitalization of about $5.8 billion and approximately $400 million in annual revenues. Analysts expect earnings to rise from about $1.83 per share in 2013, to $2.24 per share in 2014. That puts the price to earnings ratio at over 50 times, which seems expensive for a company that may only grow earnings by about 20% from 2013 to 2014.
The valuations of both 3D Systems and Stratasys seem very rich at current levels and that could be a problem when a printing giant enters the market in 2014. Not long ago, Hewlett-Packard (HPQ) CEO, Meg Whitman announced that her company will enter the 3-D printing market in mid-2014. If the company releases a competitive product, which could lead to multiple compression for many companies in the 3-D printing sector. According to an article by "The Register", Hewlett Packard is aiming to lower the cost and increase the speed of 3-D printer:
"We are excited about 3D printing," Whitman said, adding that it is a natural business for HP to enter given its heritage in printers. "We want to lead this businesses. HP labs is looking at it."
The things HP's boffins are considering is the time it takes to print an object. "To print a bottle can take eight to ten hours. That's all very interesting, but it is like watching ice melt," she said. Lower cost is also on the agenda.
"3D printing is in its infancy" she said. "It is a big opportunity and we are all over it. We will have something by the middle of next year."
A successful launch of a fast and lower cost 3-D printer is something that Hewlett Packard's competitors need to take seriously. It also brings us back to the original question as to whether or not Hewlett Packard could be a cheap way to play the 3-D printer sector. The stock is cheap by comparison, as analysts expect it to earn $3.67 per share in 2014. That puts the price to earnings ratio at a fraction of what many stocks in the 3-D space trade at. However, it's important to note that due to the size of Hewlett Packard, the 3-D printing potential might not be enough to move the needle. Considering that combined revenues for two of the top 3-D printer manufacturers came in at about $1 billion in the past year, Hewlett Packard would barely see any impact, even if it owned the entire market. That's because Hewlett Packard has annual revenues of about $112 billion.
I believe that Hewlett Packard's entry in the 3-D printing sector could put pressure on profit margins and on the price to earnings multiples for many stocks in this space. At the same time, I think Hewlett Packard is too large of a company for revenues from this potential new product line to materially benefit shareholders for at least a few years.
A recent Forbes article outlines that the total market size for 3-D products is estimated grow to about $4 billion in 2015 and reach nearly $11 billion by 2012. If these estimates turn out to be correct, it's easy to see that Hewlett Packard's revenues will still be many times greater than the entire 3-D industry for years to come. It also shows that with a market capitalization of about $8 billion, shares of 3D Systems could be stretched when compared to the total estimated value of the entire 3-D market, even many years from now.
In summary, the 3-D printing sector is still very much in its infancy. Investors who assume that the current "leaders" will end up on top in the next few years might be fooling themselves. Remember early leaders in the PC space like Commodore and Osborne? Those companies may have been some of the first but did not capitalize on the growth in the long run. I think this sector has enormous potential for smaller companies and that might lead to many investment opportunities in the future. For example, printers that use gallium to print metal objects could become an emerging trend in the industry and make some companies worth watching for a potential entry into this market. I have been researching companies that might not be actively pursuing the 3-D market now but may be able to find new market opportunities in the future. For example, I recently wrote about AXT, Inc. (AXTI), which could be worth watching in case gallium becomes popular in 3-D printers in the future.
Investing in Hewlett Packard for exposure to the 3-D printing market may not reward investors due to its size. Investing in richly valued, current market leaders may also not pay off due to the looming entry into this market by Hewlett Packard. Because of this, I think investors need to be cautious when investing in this space, and I expect a future correction in this sector (probably when Hewlett Packard releases its line of 3-D printers). I would use that as the next potential buying opportunity.
Here are some key points for Hewlett Packard:
Current share price: $29
The 52 week range is $16.03 to $30.13
Earnings estimates for 2014: $3.67 per share
Earnings estimates for 2015: $3.79 per share
Annual dividend: 58 cents per share which yields 2%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.