It's been roughly a month since I recommended investors short 3D Systems (NYSE:DDD), and the stock is already down 30%. I also recommended shorting 3D Systems when it was trading over $92, and I still think the stock has more downside potential. Thus, I still think 3D Systems is a great short candidate. Let's take a look at the reasons why.
Investors have bid up 3D Systems in the hope that it will revolutionize industrial printing and also that 3D printers will become an everyday household object in the future, but I don't see this happening anytime soon. There are many things you can make with the help of a 3D printer, but people seem to ignore the fact that they will need a very expensive high-end 3D printer, which uses resins or lasers, to print these objects. Many people blindly believe that they will be able to manufacture a range of products on a low-end printer (which costs roughly $800), which is definitely not true.
High Time Consumption
The method of producing a simple product via 3D printing can consume plenty of time, and can even last for a couple of days. By comparison, conventional industrial machines can churn out thousands of fully-finished products every day, and there's no way a present-day 3D printer can compete against that. Also, the fact that a 3D printer does not produce a fully-finished object and requires an extra step of removing the object from the printer further delays the printing process. This completely rules out the possibility of 3D printing "revolutionizing" the manufacturing industry.
The strength of the finished product is another issue which comes with this technology. Since this technology uses layering techniques, the printed product will not be as strong as the conventionally manufactured product.
As of now, 3D printers can only print in plastic, resins, and certain metals. These printers are not capable of printing products in mixed materials, and the majority of the products that are used today are manufactured by a combination of materials, and this adds to the limitations of 3D printing. 3D Systems does NOT print in metal. This further restricts the uses of 3D printers.
3D printing is not a user-friendly process, and you will need a CAD model to print any desired product. It goes without saying that you will need to learn how CAD works in order to make a model, and mastering the program can take years. Therefore, it is certainly not rational to assume that 3D printers will become an everyday household item in the future.
3D printers use a layer-by-layer technique for manufacturing an object, which ensures homogeneous strength. The product which has been manufactured may look exactly the way you wanted it and will have uniform strength throughout, but it will be weaker than the traditionally manufactured products.
Patent expiry is definitely bad news for 3D Systems. Eleven key 3D printing patents are set to expire in 2014, which will open the gates for entry of new companies and give rise to a price war. 3D Systems' gross profit margin is already at the risk of compression in 2014, and the entry of new peers will further put downward pressure on it.
Out of all the peers, the impending entry of Hewlett-Packard (NYSE:HPQ) is probably 3D Systems' biggest cause of concern. Hewlett-Packard CEO, Meg Whitman recently announced that the company plans to enter the market in June. The company claimed it has solved several of the problems with 3D printing, including its speed, and plans "a big technology announcement in June" about it.
Acquisition Spree Will End In Disaster
As per a Forbes article, 50% of all acquisitions end up in failure. 3D Systems has acquired close to 45 companies in the last two years. Statistically, this means over 20 of 3D Systems' M&A will fail. Stratasys (NASDAQ:SSYS) has successfully integrated the acquisition of MakerBot into its core business; however, I don't think 3D Systems will be able to do the same. I don't think it is possible for any company to integrate over 40 companies into its core business in less than two years, let alone 3D Systems. Thus, I think 3D Systems' acquisition spree will end in a disaster.
Investors who have made over 30% profit in the last few months can consider covering their short positions, however in the long term, I still think 3D Systems' share price will go down. Due to the aforesaid reasons, I think 3D Systems is still a good short candidate.
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.