[author's note] Immediately after publishing this post I noticed DDD down nearly 6% this morning due to a downgrade by Merrill Lynch.
Valuation - Tech, 1999?
At a current price to sales ratio of 17.99 and a forward PE ratio of 93.88 (according to Yahoo Finance), we'll let the individual reader decide what represents value when talking about 3D Systems (NYSE:DDD). Similar lofty valuations are present in competitors like Stratasys (NASDAQ:SSYS) and ExOne (NASDAQ:XONE). But we will make a case that these companies should be valued closer to traditional automated manufacturing equipment makers than some sort of first mover in a transformative and disruptive technology. Or at least that this is going to be their eventual destiny.
I am not an equities analyst, but rather just a former manufacturing company owner who bought and utilized serious high end automated equipment over the years. Price tag in $100,000 to $250,000 range per unit. Beyond that I am now a macro financial market manager with no real interest in digging too deeply into too many individual stock situations. So that is the caveat for readers to consider.
I have been aware of 3-D Printing (also known as "additive manufacturing") for nearly a decade and a half. In the early days these cool gizmos were relegated to the low volume world of rapid prototyping and design for industrial applications. As the industry and the technology has advanced, the door has opened to shop floor production and even hobbyists with low cost consumer models at home in their garages and basements.
Enter Wall Street; enter a massive hype machine including 3D Systems Partners With Hershey for 3D-Printed Treats and Stratasys' chestnut Super Bowl Cleats Signal 3D Printer Takeovers. The promo never seems to end in this space. This is all Wall Street (defined mostly as analysts and firms with sector coverage and by extension the mainstream financial media) and not the product of real manufacturing people. The "wow" factor if you will, is being sold to the public. It's a promo operation.
Folks, the internet was really cool too in 1999. Transformative, disruptive and frankly the core reason I am able to pursue my passion in publicly writing about financial markets and macro economic structures. 3D Printing is no doubt a positive and even disruptive step in modern manufacturing as it cuts into traditional manufacturing areas. Those affected to varying degrees would be casting, molding, plastic injection molding and precision machining.
But in 1977 when I was a kid working as a machinist at my Dad's company in the summers we were among the very first to adopt "automated" CNC (computer numerical controlled) machining. Wow, it had a big, tape-driven box attached to a Bridgeport miller and at the push of a button would do what a skilled machinist once did by manually turning handles on the X, Y and Z axes. I was by the way a tape programmer and button pusher, not a skilled machinist!
Fast forward a couple decades and we are a shop full of finely tuned, high speed, multi-pallet, multi-axis machines controlled by a separate CAD system with wireless download. On that note, here is a point to remember as the hype about the 3-D Printing industry gathers steam; it is companies like Autodesk (AutoCAD) (NASDAQ:ADSK) and SolidWorks that are the brains behind the printers that let's face it, are the mechanical tool for applying the media from the software model.
The industry has been using these CAD models for decades now. It is the tools that have changed and improved. Speaking of which, let's look at valuations for a CAD model software company and a CNC machine tool builder.
- AutoDesk Price/Sales: 5.4, Forward PE: 36.69
- Hurco (NASDAQ:HURC) Price/Sales: .85, Forward PE: 18.83
Please be aware that due to a very limited number of publicly traded companies within these spaces, the above is not a fair representation. Hurco especially, is not what I consider a high quality machine tool builder when you have got the quality likes of Matsuura, Kitamura (my personal favorites), Mazak and Mori Seiki out there. AutoDesk's value as relates to 3-Dp is watered down due to its scope being far wider than 3-D Printer applications.
But these are companies operating within an industry with competition that seemed to grow on trees as soon as word got out about CNC machining.
Competition, No Barrier to Entry
Going back to our little story about the first tape driven CNC, once the cat got out of the bag about this new and transformative way of replacing human skill with mechanized precision, the CNC industry simply exploded; leaving by the way our original first mover with the tape machines in the dust.
When I saw my first Matsuura it seemed as big as house and as precise and powerful as something out of a science fiction movie. Later, in 1990 our company was literally transformed by a Matsuura "450" horizontal machining center with 11 indexing pallets that would literally run all day, all night and on weekends, much of the time with nobody in the building! It was "lights out" manufacturing.
But Matsuura had an army of competitors to deal with and so too do today's 3-D Printer darlings. Let's face it, CNC machining did not have Wall Street's interest and so there was no pitch.
Manufacturing was experiencing a sea change and this was the reason that prior to going full time with my current passion in the markets I was able to make a nice living as a US manufacturer despite the commonly held belief (especially within the financial media) that "we do not make things in America anymore". Wall Street was nowhere to be found on this story … cue the crickets.
So the Wall Street hype machinery is all over 3-Dp even as Hewlett Packard (NYSE:HPQ) prepares to launch into the space, Matsuura inches closer to 3-Dp and domestic and foreign competition spring up like weeds. Now of course, HP may simply be planning to buy its way in. There are rumors of an intent to buy Stratasys by the printer giant. At these valuations, we might believe it only when we see it.
Another factor is that while China is sprouting 3-D printing companies like weeds, these are generally low quality knock offs … for now.
But the valuations of DDD, SSYS and XONE, etc. are based not on the now, but on the future. That future is likely to hold a crowded field of competition as patents expire, start ups get up to speed and the very real opportunity in 'additive manufacturing' is exploited far and wide.
During his survey of 3D printers in China, Wohlers counted more than thirty such brands. "The Chinese have much to learn (about the technology and marketing of 3D printers)," he says. "But, they are determined to figure it out." Wohlers says the situation is interesting (for producers and consumers of 3D printing) and frightening (due to the threat of competition for U.S. players). A market flooded with cheap 3D printers is also bad news for margins because they will shrink per printer.
For now, however, 3D printing is in a honeymoon phase. This enthusiasm also spilled over into the stock market as a number of 3D printing outfits made their debut on the trading floor. 3D printing IPOs and stocks had a banner year as valuations for companies reached stratospheric highs. Towards the end of the year, however, the party seemed to be ending. Valuations for 3D printing stocks crashed and there was talk of a bubble.
"I thought it was over-valued then (earlier this year) and now it (the stock price) keeps going up," says Wohlers. "I am looking at it from a positive perspective and hope that it creates new opportunities."