- Increasing competition is going to be a problem for 3D Systems after patent expiry.
- Faster printers are being developed by others, and this could hurt 3D Systems.
- Too many acquisitions seem to be taking a toll on 3D Systems’ earnings performance.
3D printing is a fast-growing industry with many companies capitalizing on this market, and 3D Systems (NYSE:DDD) has been one of the fastest-growing companies in it. But as the 3D printing industry grows, more companies are coming in to fight for a bigger slice of the market share pie. 3D printing is projected to be a $6.5 billion industry by the end of this decade, and this growth of the 3D printing market, which was worth $1.7 billion in 2011, is attracting new players, such as Hewlett-Packard (NYSE:HPQ). But HP's entry isn't the only reason why you should dump shares of 3D Systems. In fact, there are a total of five reasons why the stock is no longer a buy. Let's take a look at them one by one.
Stronger competition: Bigger players such as Hewlett Packard are now making an entry into the 3D printing market. HP's financial strength will be an important factor that will help it establish its footprint in this industry. HP has been extravagant when it comes to R&D expenses that amount to $800 million, and this policy will further help HP to come up with its own 3D printers which can be more cost effective, apart from providing better printing speeds.
Just recently, HP CEO Meg Whitman announced that the company will lay out its 3D printing blueprint in June this year. According to HP executives, sales of 3D printers and associated software and services should increase to $11 billion by 2021 from just $2.2 billion in 2012. Hence, HP is placing a bigger bet on the industry's prospects than analysts.
Patent expiry: This year, many patents related to 3D printing are expiring. This can hamper revenue of 3D systems in terms of royalty fees for patents. Adding insult to injury, many smaller start-up companies are looking to jump onto the 3D printing bandwagon, as such companies could not have afforded the royalty fees earlier and were waiting for the patents to expire. In fact, financial organizations are keen on investing in "disruptive start-up firms" as venture capitalists. One such company is Harbour Capital Group, which is keen to invest in the 3D printing market. This will again lead to higher competition with start-ups being financially backed by venture capitalists.
Unplanned buying spree: 3D Systems has made aggressive investments to acquire other players, and this has led to profitability concerns among investors. 3D Systems has been overgenerous since December last year in buying various companies. In fact, five companies have been bought by 3D Systems during this time frame and recently, it purchased Digital Playspace for an undisclosed amount. Another major acquisition of 3D System's was Xerox's (NYSE:XRX) Oregon-based solid ink engineering and development team for $32.5 million in cash. In addition, Village Systems and Gentle Giant Studios are other companies that 3D Systems has bought.
The problem with these acquisitions is that 3D Systems has acquired too many companies too fast, and integrating them will take time. But, on the other hand, it is also seen that these acquisitions haven't contributed much to 3D Systems' earnings. In fact, in the previous quarter, 3D Systems' earnings grew just 3% year over year. The company is now looking to invest in research and development, which ultimately nullifies the positive effect that the acquisitions were supposed to have.
So, it can be said that in a bid to expand its reach to as many verticals of the 3D printing market as possible, 3D Systems messed up somewhere and now it is looking at organic growth possibilities.
Price and speed: This is the most important constraint that may lead many users and corporations to refrain from embracing 3D printing for their mainstream operations. While price is the most important factor for general consumers, speed plays an important factor in the industrial arena. High prices and low speeds are a major hindrance that would limit the adoption of 3D printing.
Excessive investments might be needed on various research and development activities before a 3D printer with a lower price and a higher speed comes out. This would affect the bottom line of companies such as 3D Systems. On the contrary, companies such as HP, which have a very high R&D budget and a huge cash position, stand to have a better chance of coming out with a low-priced higher speed 3D printer.
Super speed 3D printers: But, it seems that high speed 3D printers, mainly for industrial usage, would soon be in the market. Cincinnati Inc. has partnered with Oak Ridge National Laboratory to produce super fast 3D printers. The projected printing speed can be 200 to 500 times faster than the existing 3D printers and would be capable of printing components that would be 10 times larger. This can create more trouble for 3D Systems going forward.
It looks like 3D Systems' days of dominance will be a thing of the past going forward. The stock has lost a staggering 40% of its value in 2014, and this downward trend looks set to continue if we look at the reasons stated above. In fact, 3D Systems has a short float of 29.5%, which is very high. This indicates that there are many who are betting against the success of 3D Systems, and this could be the case, since the company is facing a lot of headwinds.