- HPQ threatens to revolutionize the 3D printing industry.
- Limited R&D budgets by sector leaders leave an opening for new entrants.
- High flying 3D printing stocks can fall even further.
For the better part of two years, the 3D printing stocks of 3D Systems (NYSE:DDD), Stratasys (NASDAQ:SSYS), and ExOne (NASDAQ:XONE) saw unabated growth and soaring stock prices. The market wasn't paying attention to reality or accepting any potential threats or risks. Remember that in a normal market, a stock or sector of stocks that rise significantly typically attracts competitors and larger entrants from similar sectors. To an extent, too much success can create the ultimate downfall, as competition leads to lower margins. At the same time, fast growth and substantial profits will also drive in other entrants even if somewhat based on perception more than reality.
Just this week, the sector finally got confirmation that one of the biggest threats is going to come to fruition. Printing technology leader, Hewlett-Packard Co. (NYSE:HPQ) confirmed intentions to unveil revolutionary 3D products by June. The move was long speculated as a threat to the industry, but investors pushing the sector stocks up to absurd valuation multiples mostly ignored this certain risk.
With leader 3D Systems plunging some 40% since peaking at the start of the year, investors are faced with the reality that significant competition will begin in 2014. Long-term, new entrants will grow the size of the pie for the sector, but it doesn't mean that 3D Systems or Stratasys will see higher stock prices anytime soon. Investors need to look no further than the natural gas shale boom and Chesapeake Energy (NYSE:CHK) too see what happens to the leading stock when sector growth attracts more investments.
The concern for investors going forward is the limited research and development, or R&D, budgets of the sector leaders and the massive size of Hewlett-Packard. These limited budgets combined with industry growth that might not exceed 20% places these stocks in precarious positions after rampant stock gains in the last couple of years.
Most people are familiar with Hewlett-Packard, but I'm not sure the market realizes that the company is still a global behemoth with revenue sitting in the $110 billion range. As an example, even Microsoft (NASDAQ:MSFT) didn't reach revenue of $80 billion last year summing up the enormous size of Hewlett-Packard.
A big question exists in whether the leader in 2D printing can transition to the 3D world. The company must move from printing documents on paper to prototype parts on a vast array of materials in order to succeed in the 3D printing space. The company has experience from selling HP-branded Stratasys printers in a marketing arrangement that ended in 2012, but selling printers is far different from developing them.
Regardless, CEO Meg Whitman promised a big technology announcement planned for June. Reportedly, the company has resolved limitations involved with the quality and durability of the finished products. She suggests the company is focusing on the enterprise space with the intention of helping companies manufacture parts and test prototypes rather than helping individuals print at home.
Doubt anybody disagrees with the concept that the enterprise market will hold the vast revenue potential though the home market appears more inline with the history of Hewlett-Packard. What experience does the company have making airline parts or working in the manufacturing of parts for rapid prototypes?
Limited R&D Spending
One big concern all along has been the limited amount of R&D expenses from the sector leaders. Both 3D Systems and Stratasys spend around $17 million on a quarterly basis. While the companies both have a significant lead over Hewlett-Packard in terms of total spent on developing the sector over the years, it wouldn't take much for the company with a quarterly research budget of over $800 million to at least match or even exceed the budgets of the sector leaders.
The following chart highlights the surging budgets of the 3D printer companies, but the amounts still fall far short of the levels of the major printer and computer companies.
One of the potentially self-inflicted wounds created by the industry was the constant overhyping of the growth rates. While hyping growth might draw in new customers and investors, the constant purchases of competitors led to misleading growth rates. 3D Systems has been good at highlighting the organic growth rate, but the constant headline growth rates have hit 40% and even 50% in the last couple of years. Those numbers draw the attention of unwanted competitors.
Depending on the industry source, the growth rates are forecasted somewhere in the range of 20% to near 30%. A recent research report by the Freedonia group forecasts growth until 2017 to average only 20.7%.
Another industry research firm Wohlers suggests the growth rate has actually been closer to 27% in the last three years. The firm forecasts revenue to surge from $2.2 billion in 2012 to $6 billion by 2017.
Either way, growth is solid but maybe not spectacular enough to bring in unwanted competitors. With stock prices jumping 500% in two years and headline revenue growth exceeding 50%, any company with any capabilities in printing technologies is now exploring 3D printing.
Farther To Fall
With stocks, investors can always draw a different conclusion depending on the time frame reviewed. In the case of the 3D printing stocks, a short-time view presents the opportunity to buy beaten down stocks. Anybody looking over a time period of at least two years sees stocks that have farther to fall. Perspective is very important when reviewing these stocks based on the chart below.
The 3D printing stocks are likely to face a weak 2014 as investors finally face the risks any sector typically faces instead of seeing the market as only one directional. Sure the entrance of Hewlett-Packard draws attention to the sector and might help drive faster adoption rates, but the industry had already obtained a high profile and limited doubt that it would reach mass adoption. The valuation of the stocks again left little need for Hewlett-Packard to provide support for the industry. Instead, the entry of Hewlett-Packard brings more concerns to the investors in the stocks of 3D printers - 3D Systems, Stratasys, and ExOne - that didn't exist prior to last week. Especially concerning is the relatively low level of R&D spending by the leading players now facing a deep pocketed competitor.
The most likely scenario is lower stock prices in the next few months and possibly weak results during Q2. Will customers delay orders waiting to see what Hewlett-Packard has invented? Long-term, the focused company tends to win out placing 3D Systems or Stratasys in the driver seat. The stocks though are a different story for now.
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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.