Has 3D Systems Lost Its Advantage?

| About: 3D Systems (DDD)

3D Systems (NYSE:DDD) seems to be gradually losing its superiority in the additive manufacturing industry to peers such as Stratasys (NASDAQ:SSYS) and potentially Hewlett-Packard (NYSE:HPQ). As the 3D printing market matures, the going might become even tougher for 3D Systems. According to Credit Suisse, the size of the 3D printing industry was expected to be $625 million in 2016, but it was revised it to $800 million, showing the prospects of the industry. With such bright prospects, competition is no doubt expected to increase in the industry.

As we see, 3D Systems and Stratasys are striving to be the leaders in the 3D printing arena, while HP is looking to establish its base. However, Stratasys might be gaining some ground over 3D Systems. Let's see how.

Strategic moves

The acquisition policy of both the companies is quite competitive. However, the major risk with 3D Systems is its acquisition policy that can burn investors. 3D Systems has also been spending lavishly to promote its sales at the cost of higher marketing expenditure, affecting the margins.

As we see more and more competition in the 3D printing space, along with technology enhancements, one can expect the market share of 3D Systems to be eroded by newcomers such as HP in the future.

Factors in play

Printing speed, price, technology upgrades, printing materials can be the main factors that might decide the leader in 3D printers in the future.

Speed: Speed is an important factor that can affect the 3D printing market in the future. This is a significant constraint right now, so it remains to be seen how and when industries unanimously embrace 3D printers. When this happens, 3D Systems might incur lower marketing costs. However, HP can steal its advantage since the company already has strong relationships with various companies worldwide due to its traditional printer business.

Also, objects generated by 3D printers can always be painted as a part of the prototyping of the design, but if color is a part of the design, it can save lot of time in object prototyping. Since 3D printing is all about prototyping, this saves time during the process, which is a major advantage for industrial 3D printers.

To capitalize on this advantage, Stratasys is the first to release a multi-color 3D printer with multi materials, known as Objet500. This should certainly be more widely accepted in industrial applications as it saves time, adding to Stratasys' advantage.

Domestic use: Home and education is one segment of 3D printing, which has enormous prospect in the future. To tap this market, price is one of the biggest constraints, and Stratasys is focusing on all price points, which is why it has released low-priced 3D printers for domestic users. The MakerBot Replicator Mini launched recently claims to be the smallest and the cheapest 3D printer which targets home users, strengthening Stratasys' position in the industry.

Educational use: In November 2013, Stratasys had launched MakerBot for educational institutions with the aim of delivering a 3D printer to every American high school. In America, as per the census report of 2009-10, the total number of public schools was 98,817, while the total number of private schools was 33,366, which means big opportunity for Stratasys as it aggressively sells its 3D printers for these purposes and prices them right.

In the education segment, Stratasys seems to have gained more acceptance than 3D Systems. Stratasys' MakerBot is targeting university graduates and engineers of the future. There is also an initiative to establish MakerBot innovation centers in various universities and educational institutes. Stratasys is looking to tap this unexplored market of 3D printers in the education segment, and this is already exemplified with various universities as customers of Stratasys.

For the future

It not just 3D printing, but Stratasys is also looking at 4D printing, and it has already achieved a breakthrough with 4D printing materials. Printing materials developed by Stratasys transform when in contact with water, opening up a wide range of applications.

In the future, there might be self assembled objects with intricate designs when submerged in water. The innovation of such materials may not be limited to just reaction with water, but can also be experimented with heat, light and sound.

3D Systems' woes

3D Systems had crashed early in February when the company reported earnings. Its weak guidance for the fourth-quarter and the entire fiscal year scared investors, and the stock tumbled around 16%. The lowered earnings outlook was due to the fact that 3D Systems is planning to invest aggressively in new products.

This is probably because peers such as Stratasys are unveiling new products and are targeting the mass market. Moreover, Stratasys is also looking to speed up the industrial 3D printing process through its multi-color 3D printer, and this is another cause of concern for 3D Systems.

Valuation and conclusion

So, it can be said that 3D Systems is facing pressure from both existing peers and probable competitors such as HP in the additive manufacturing space. Also, with a P/E ratio of 160, 3D Systems is quite expensive.

On a forward P/E basis also, 3D Systems is expensive at a multiple of almost 84 when compared to Stratasys' 55. HP is the cheapest of them all, and it might prove to be a solid pick if it enters the 3D printing space, as it will be the cheapest of the three and will already have an existing network of clients and distributors to sell its products. All in all, it can be said that 3D Systems is under siege, and investors should avoid it.

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.

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