Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)  

Hewlett-Packard’s (NYSE:HPQ) CEO, Meg Whitman, at the shareholders meeting on March 20, announced that the company is planning to enter the 3-D printer space by the end of this Fiscal year. [1] (HP’s fiscal year ends on 31st October.) Although, the 3-D printing technology is over a decade old, it has recently caught the imagination of manufacturing industry, as some of the advancements in the field have reduced price of owning, and manufacturing with, a 3-D printer. As a result, the 3-D printing industry is expected to grow at a robust pace of over 30% per year in the coming years. At present, small companies such as 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS) operate in this industry. However, with HP’s entry into this market, competition will surely heat up. While HP has not divulged much information on its product offering, in this article, we will size up the 3-D printer market and analyze why HP is entering this market. Additionally, we will try to analyze how HP’s foray will impact the 3-D printing industry.

Sizing The 3-D Printer Market

The global three-dimensional (3-D) printing (also known as additive manufacturing, rapid prototyping or direct manufacturing) industry is widely considered as a disruptive force to a number of manufacturing practices around the world, as it reduces the need to maintain and operate factories that have significant capital requirements.

According to Gartner, the combined end-user spending on 3-D printers (3-DPs) is estimated to be at $412 million in 2013, a year-on-year growth of 43% over the $288 million spending in 2012. [2] Enterprise spending is estimated to total more than $325 million in 2013, while the consumer segment is estimated to reach nearly $87 million. Gartner also projects that 3-DP spending will grow by 62% in 2014, reaching $669 million, with enterprise spending of $536 million and consumer spending of $133 million. Gartner estimates the number of units shipped to increase from 56,507 in 2013 to over 98,065 in 2014. It also expect the units shipped to double in 2015.

Most of the growth in 3-D printing spending is currently driven by one-off or small-run models for product design and industrial prototyping, jigs and fixtures used in manufacturing processes and mass customization of finished goods. However, as the 3-D printing technology advances, both in hardware and software technology together with reduced materials cost and complexity of creating 3-D printed items, its applications will expand to mass market areas such as architecture, defense, medical products and jewelry design. As a result, according to Wholers Associates, the sale of 3-D printing products and services, which includes printers, ink and products, is expected to grow to over $10.8 billion by 2021. [3] However, this number pales in comparison to the revenues of the global manufacturing industry, which runs in trillions of dollars. Considering the market size of the manufacturing industry, we believe that the addressable size for 3-D printer industry and its products is very large.

Why Is HP Entering 3-D Printer Market Now?

HP is a leader in the 2-D printer market, and its market share was nearly 40% in 2013 according to IDC. [4] The company believes that 3-D printing is a natural progression of its 2-D printer business, where it has a sizeable share. In its shareholders meeting held last week, HP announced that it has plans to enter the commercial 3-D printing market by the end of this fiscal year. The main reason why HP is entering the 3-D printer market now is because a host of core patents such as apparatus for producing parts by selective sintering have either expired or are expiring within a year. [5] As a result, HP won’t have to spend huge amount of time and money on developing new technology and processes for discovering how to model 3-D objects. Furthermore, the high cost of consumables in 3-D printing has been a major barrier to innovation in the field. However, HP claims to have solved a number of technical problems such as low quality print output and long printing time that have hindered broader adoption of the high-tech manufacturing process.

HP’s Foray To Positively Impact 3-D Printing Industry

HP’s foray in 3-D printing will add some momentum to a fledgling industry that is dominated by smaller players and could help counter criticism that the technology is still too immature for widespread consumer adoption. Moreover, HP’s entry will bolster innovation in the industry as it has deep pockets (HP has nearly $16 billion in cash on its books), and can easily fund any R&D to improve future processes or ink (Plastic filament), which costs anywhere between $25 to $45 for a kilogram depending on the quality and manufacturer.

Additionally, HP can expedite the adoption process since it can mass produce 3-D printers cheaply and market it through its well established distribution channel. HP has a relationship with several companies to whom it supplies its printer and PC. It can help these companies to manufacture some of their products as well. Such a move will create synergy not only for HP, but for its customers as well.

Although, the company did not disclose much about the product that might be introduced, it said that it will first target “enterprise” customers, which are comprised of businesses, government agencies and other organizations. While it is too early to speculate, we believe that most of the revenues from 3-D printer will come from ink sale rather than sale of unit printers, primarily due to the fact that as adoption of 3-D printing gains traction, manufacturers will require more ink.

We currently have a near $24.8 price estimate for HP, which is ~25% below of the current market price.

Notes:

  1. Q&A with Martin Fink: What is HP Doing in 3-D Printing?, Updated in March 22 2014, www.hp.com
  2. Gartner Says Worldwide Shipments of 3-D Printers to Grow 49 Percent in 2013, October 02 2013, www.gartner.com
  3. The Use of 3-D Printing for Final Part Production Continues Impressive 10-Year Growth Trend, November 18 2013, www.wholersassociates.com
  4. IDC Finds Continued Growth in the Worldwide Hardcopy Peripherals Market in the Fourth Quarter of 2013, February 19 2014, www.idc.com
  5. Many 3-D Printing Patents Are Expiring Soon: Here’s A Round Up & Overview of Them, December 29 2013, www.3-Dprintingindustry.com

Disclosure: No positions

Source: Why Is HP Entering The 3-D Printing Industry?