3D Systems is the most popular 3-D printing company in the market, carrying an industry-high market cap of $7.3 billion. Between the years of 2012 and 2014, gains for the stock reached nearly 900%. Concerns regarding longevity in the growth of industrial and consumer 3-D printing now has the company's stock falling, however, and many questioning its future. Thankfully, competitors Stratasys and ExOne (NASDAQ:XONE) might provide some clarity as for the outlook, along with an indication of where to invest.
Is the industrial side insignificant?
3D Systems' growth looks impressive at first glance, including 45% last year. Investors must understand that the majority of this growth is a result of 40 acquisitions over the last three years, however. In other words, it has bought growth.
Essentially, we can look at 3D Systems from two different angles. There is the consumer business that sells 3D printers to everyday folks, and then there is the industrial business that makes larger printers used by companies for bigger items.
The latter is an old business that's been around for more than two decades, which has an annualized growth rate in the mid-single digits. This industry is also highly saturated with competition. This includes ExOne, which went public last year while interest was high for 3D printing stocks, which in turn helped it raise lots of capital.
In ExOne's last quarter it sold eight total high-end printers, creating revenue of $11.6 million. It sold just four in the quarter before. While this shows growth, such performance has been wildly inconsistent during ExOne's short public company life, as customers make yearly decisions to purchase such printers due to their expensive cost. As a result, looking at ExOne on an annual basis is important to get a proper idea of growth. But still, given its $650 million market cap, investors are taking a massive bet on a company with such low volume.
Anyway, let's get back to 3D Systems and the industrial segment. This segment is identified mostly by metal printing. In this metal printing industry, 3D Systems only has a presence because of a $20 million acquisition of Phenix Systems last year. With very little growth and annual revenue below $10 million, 3D Systems is actually more insignificant than ExOne in this space; this is significant as we've already established that the latter company has too little sales volume for investment comfort.
Is anyone buying the consumer products?
To further assess the 3D Systems outlook for both its stock and its fundamentals, we'll next turn to the highly touted consumer space.
3D Systems has one of the two most talked about 3-D printing consumer products, which is the Cubify; the other is Stratasys' Makerbot.
The Cubify was supposed to be the next big thing, a product cheap enough for consumers to afford but large enough to print objects of use and value, much like Stratasys' Makerbot. And while sales for the Cubify and Makerbot where similar in each company's most recent quarter -- Cubify sold 6,000 and the Makerbot between 4,000 and 5,000 units -- there are reasons to believe that sales of the Cubify may be losing steam. On Amazon, the Cubify's sales ranking is currently 20,111. This obviously changes by the day, but the fact that it only received 14 reviews might serve as a sign of weak consumer interest.
With that said, Stratasys' Makerbot is performing better. This is a consumer product/brand that was acquired last year by Stratasys, and is more expensive, which is likely why fewer units were originally sold in comparison to the Cubify. Yet, its current sales ranking on Amazon is 1,059, and it has 52 reviews which are also more positive than those for Cubify. Thus, it appears that Stratasys is the company whose product is performing better, and despite being more expensive.
Is there anywhere to invest?
With all things considered, it really is hard to determine why 3D Systems carries such a large market capitalization. This is a company that's not really a leader in any one segment of the industry, but rather acquires a slew of companies that all specialize in very different segments. This makes it difficult to identify any long-term synergy.
On the flipside, Stratasys is not only owning the consumer space but also maintains a strong presence in the industrial and enterprise segments of the industry as well. While Stratasys has also grown via acquisitions, Stratasys looks very well positioned to grow organically. The difference between market share on an installed system basis shows a large disconnect between the two companies, as 3D Systems is estimated to own 17.5% of the market while Stratasys holds nearly 39% .
With that said, the network that Stratasys has created implies larger long-term revenue, as does the fact that Makerbot is creating separation from the Cubify with consumers. So, while 3D Systems and Stratasys are guiding for $700 million and $670 million in full-year revenue respectively, and both companies have seen near identical organic growth - 3D Systems was 30% while Stratasys' organic growth was 26% in most recent quarter - it seems that Stratasys has an opportunity to become the dominant consumer name of the future.
Back in 2012, 3D Systems could acquire companies for two to four times sales. Those companies would then add to its year-over-year returns. As a result of the stock's massive return, however, premiums for such acquisitions have increased as all public companies in the space now trade at a premium of at least 10 times trailing 12 month sales.
Stratasys is trading at 8.6 times future sales and looking fundamentally solid, while 3D Systems trades with a 10.4 times forward sales multiple with a slew of lingering problems. To be sure, both companies are pricey. If acquisitions and growth do in fact become more difficult, then it is a near certainty that this industry as a whole will see a significant decline in valuation as well.
However, it is at this point that investors should have their eyes open. Such a decline means that Stratasys might be bought cheaper, and could make a very solid investment as the pretenders are sorted from the contenders.