When Wal-Mart Stores Inc. (NYSE:WMT) CEO Doug McMillon expressed interest in 3D printing last week, many ears began to perk up. This announcement makes Wal-Mart the third major company to cause massive 3D printing chatter during the last month. The first two are Google Inc. (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL), who have been the subject of rumors involving "all in one" 3D printers. Unlike the Google and Apple rumors, the speculation about Wal-Mart came from statements made by the company's CEO. Doug McMillon also announced plans to ramp up Wal-Mart's pace of acquisitions and partnerships.
As the world's largest consumer retailer and the world's ninth largest company by market cap, Wal-Mart has come dangerously close to providing every product and service that a consumer could ever want or need. In addition to providing one-stop warehouses for consumers to meet all their needs, Wal-Mart is also usually cheaper than most of its competitors. Despite Wal-Mart's seemingly endless advantages, its 1.6% growth over the past year makes it the only one of the world's top-10 companies to experience single-digit growth within that period.
Over the past year, there have been five top-10 players that have announced some type of business plan that involves 3D printing. The first three I have already mentioned: Google, Apple, and now Wal-Mart. The other two are Microsoft Corporation (NASDAQ:MSFT) and General Electric Company (NYSE:GE).
|Stock||Market Cap (billions)||1 YR. Change in Mkt. Cap (6-4-14)|
|Exxon Mobile (NYSE:XOM)||(2) 429.6||10.2%|
|Berkshire Hathaway (BRK-A)||(5) 313.6||12.3%|
|Johnson & Johnson (NYSE:JNJ)||(6) 290.5||22.1%|
|Wells Fargo (NYSE:WFC)||(7) 268.8||26.2%|
|General Electric||(8) 266.2||12.2%|
|Royal Dutch Shell (RDS-A)||(10) 247.8||18.1%|
Does Wal-Mart Need to Make Some Changes
Technology companies like Google, Apple, and Microsoft are always in a "sink or swim" mode when it comes to releasing innovative technology. Whether it's a new phone, new software, or other gadget, there is immense pressure put on these tech giants to continuously perform. The dilemma that Wal-Mart may have to address is a beast of a different nature. In addition to competition from online retailers and dollar stores, they are struggling with a disgruntled labor force.
Online Retailers and Dollar Stores
As far as online retailers are concerned, the advantages are pretty obvious. Customers of online retail vendors do not have to interact with disgruntled employees, wait in line, or even leave their house. These retailers, which consists of companies like Amazon.com Inc. (NASDAQ:AMZN), have much fewer laborers. The workers perform their tasks in a factory-type setting of a distribution center. At Amazon, the average starting salary for a warehouse associate is almost $12/hour. To put this in perspective, half of Wal-Mart's full-time hourly employees make less than $12.83/hour. For other Wal-Mart customers, bullish gains in the market have lined their pockets to a high enough level that they can afford more expensive competitors. Now they are willing to pay more for shipping and handling and doorstep delivery that is associated with online retailing.
As far as dollar stores are concerned, most of the advantage comes from the fact that their name isn't Wal-Mart. Dollar stores may be able to provide certain products cheaper prices than Wal-Mart, but I do not believe they can beat the convenience or provide as efficient shipment of bulk-size product loads as Wal-Mart. Although Wal-Mart has successfully implemented policies against unionization, there is a protesting group called OUR Wal-Mart that is backed by the United Food and Commercial Workers Union. This group has raised national attention by protesting for higher wages.
Wal-Mart: The Company, the Workers, and 3D Printing's Role
Wal-Mart could very well be the first major company to be forced to resort to 3D printing as a means of survival. That doesn't mean it will necessarily bring the company success. It also doesn't mean that 3D printing is the only way for Wal-Mart to stay above water. My point is that Wal-Mart is probably not looking at 3D printing as a way to keep consumers up to date with hip products; they could be looking at the technology as a way to replace labor.
There are at least 1.4 million Americans currently employed by Wal-Mart. Contrary to the belief of Robert Reich, Chancellor's Professor of Public Policy at U.C. Berkeley, it seems like Wal-Mart is still struggling to achieve sufficient production from its workforce. The left-leaning professor recently stated that Wal-Mart "can easily afford to pay $15 an hour."
I believe that Wal-Mart, despite the fact that it had a net income of $16 billion for 2013, cannot continue to raise the wages for 1.4 million employees. National and state minimum wage laws are already taking a toll on the company. The painful reality is that entry-level tasks at places like Wal-Mart do not take a lot of skill. As Doug Altner from Forbes points out, most of these 1.4 million Americans are not trying to find other opportunities. In fact, many more Americans are trying to get a job working for the world's largest retailer.
For Wal-Mart, commercial and industrial 3D printers could fundamentally change their human labor requirements. More products can be built in-store and there would be less work involving stocking shelves and storing shipped items. This would require a smaller workforce; however, the 3D printing jobs would require more skilled laborers.
For the macro picture, the impending "3D Printing Revolution" could put millions of unskilled retail workers out of their current jobs. For Wal-Mart, it would likely provide relief for the corporation to be left with fewer, yet higher paid employees. Unfortunately for the company, their current business model demands a very large quantity of unskilled labor. While in earlier decades, Wal-Mart would be lauded for providing such opportunities, in today's world they are painted as evil villains.
A Look at Potential Acquisition Targets
The first and most obvious acquisition target is 3D Systems Corp. (NYSE:DDD). Wal-Mart is to the retail world the same thing 3D Systems is to additive manufacturing. In their respective fields, both companies have tried to penetrate every possible niche market. It may be a stretch for Wal-Mart to go with a company as large as 3D Systems. Wal-Mart only has about $7.3 billion in cash and 3D Systems has a market cap above $5 billion.
I also believe that Wal-Mart is in the best position to fully and directly utilize all of the products and services provided by 3D Systems. Between its distribution centers and its retail stores, Wal-Mart can benefit from consumer, commercial, and industrial applications. Unlike Apple and Google, who are also rumored to have 3D printing plans, Wal-Mart is more likely to act as an owning partner. I believe that 3D Systems would greatly benefit from ownership that helps to organize and direct talent without micromanaging the advancements of technology.
The next company that came to my mind may come as a surprise. Voxeljet AG (NYSE:VJET), a German maker of commercial and industrial 3D printers, has made a boomerang of its share price since the company held its IPO in November of 2013. Despite extremely low machine sales, Voxeljet's massive capabilities in scale and speed of production make it a reasonable target for Wal-Mart. I believe that Wal-Mart would benefit more from commercial applications of 3D printing than industrial or consumer applications. Voxeljet's machines are the most heavily slanted towards the commercial space.
With its current market cap of only $216 million (as of 6-5-2014), Voxeljet is much more affordable than 3D Systems. Voxeljet's P/S ratio of 20 is not an encouraging sign; however, sales may not be as much of a concern if Wal-Mart decides to use their machines for direct manufacturing purposes. Voxeljet does not provide any metal 3D printing products or services. This should not be a concern for Wal-Mart given that so many of their products do not have metal components.
Other possibilities include privately-held companies like Germany-based EOS. Although it is hard to point out any private companies that would be of exceptional use to Wal-Mart, there are probably many hidden gems remaining that could fit in well with the company's plan to accelerate its pace of acquisitions.
It may be worth noting that I do not believe Arcam AB (OTCPK:AMAVF) will be an acquisition target. Arcam is much more geared towards medical and aerospace applications. Perhaps more surprisingly, I do not consider Stratasys Ltd. (NASDAQ:SSYS) to be acquisition material for Wal-Mart. Although Stratasys offers a vast array of products and services, it also offers a more niche array of products and services. Furthermore, Stratasys has not been widely discussed as an acquisition for any major company.
Risks, Questions, and Concerns
1) Wal-Mart has a market cap of $250 billion. This means that it would be hard for any type of 3D printing acquisition, speculation, or news to have a significant and immediate impact on share price.
2) How long will it take for 3D printers to displace American Wal-Mart workers? It will probably take a lot of training and trials before any long-term plans involving 3D printing are implemented. Given Wal-Mart's domestic labor issues and the international concerns that were expressed by another Seeking Alpha contributor, the company's revenue, net income, and share price could continue to decline in the short-term future.
3) Should I buy Wal-Mart now that they have announced plans to potentially enter the exciting 3D printing space? Even though I believe that 3D printing has the potential to redefine Wal-Mart's operations and take the company to a new level, I do not consider the stock a buy. I consider it to be a hold. It would take years for 3D printing to fundamentally impact a company like Wal-Mart. Furthermore, nothing is guaranteed. If Wal-Mart does decide to make a 3D printing acquisition, then the entire 3D printing sector is likely to gain of momentum. When a top-10 company makes a significant investment in a new technology, investor confidence tends to rise throughout the entire sector.
4) Online Retailers and dollar stores remain as threats. These competitors should not be blown out of proportion, but they have continued to take away Wal-Mart's market share nonetheless.
5) Wal-Mart has already made a deal with Plug Power Inc. (PLUG) this year. Are they getting desperate? I believe they are definitely trying to think outside the box to save money. There is a fine line between taking risks and being desperate.
I do not believe investors should buy shares of Wal-Mart merely based on the possibility that they might use 3D printers. The company is dealing with a lot right now. Based on the company's history, there are reasons to believe it will come back strong. If anything, I believe the future of Wal-Mart should encourage current holders not to sell.
For the pure 3D printing companies that I discussed as possible acquisition targets, including 3D Systems and Voxeljet, there could be huge upside due to a prospective acquisition by Wal-Mart. If Wal-Mart actually acquires a 3D printing company, then the sector will regain a significant portion of the investor confidence that was lost earlier this year.
Disclosure: I am long DDD, SSYS, AMAVF. 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.