3D Systems might be positioned to benefit from a fast-growing 3D printing industry, but competitors such as Hewlett-Packard will make the going difficult.
The expiry of patents will hurt 3D Systems.
Too many acquisitions are hurting 3D Systems, and the company even diluted shareholder value recently to make more acquisitions.
Disruptive innovations in the 3D printing industry might hurt 3D Systems going forward.
3D Systems (NYSE:DDD) is not in the best of health this year. Although the company reported good growth in revenue in the last-reported first quarter, its earnings plunged on the back of investments to grow the business. This looks like a smart move, as analysts expect the 3D printing industry to grow at a stupendous rate of 45% per year till 2018, hitting a size of $16.2 billion, according to Canalys.
But, this massive growth in the 3D printing industry is attracting more competitors that are challenging 3D Systems. Hewlett-Packard (NYSE:HPQ), for example, recently announced that it will be entering the business 3D printing market, intensifying the competition in the industry. But, besides HP, there are five other important reasons that could hurt 3D Systems going forward. Let's check them out.
As discussed earlier, the prospects of the 3D printing industry look enticing, which is attracting many big players. Hewlett-Packard is now gearing up to enter this market. Last month, HP CEO Meg Whitman revealed the company's plans for the 3D printing market. As reported on 3DPrint.com, Whitman said:
"We're focused on business 3D printing, not consumer 3D printing," Whitman told CNBC's Jim Cramer. "We'll announce a 3D printing technology at the end of this year, and we think there's a real opportunity here."
"This is an acorn that we're planting that will become an oak tree in the future. This is a business we need to be in. It's very consistent with our heritage, but we're doing that in a lot of businesses. You know, innovation, you have to plant those acorns before they become oak trees and you have to have patience in terms of development cycles. You have to continuously and consistently invest in R&D."
In addition, HP's strong financial position will be a key reason why it can establish its presence in the 3D printing market. It has a cash balance of $15 billion and spends handsomely on research and development, which gives it enough fire power to address the 3D printing opportunity.
Patents to expire
Many 3D printing patents are expiring. As a result, 3D Systems' royalty fees will take a hit. Another threat for the company is that the patent expiry will allow many small companies to take a bite of the 3D printing opportunity. Earlier, as the smaller companies were not able to afford the royalty fees, they stayed away from the market and waited for the patents to expire. For example, the foray of venture capitalists such as Harbour Capital Group, will lead to growth in the number of start-ups looking to address the 3D printing opportunity.
Too many acquisitions
3D Systems has made aggressive acquisitions which have hurt its profit margins. In fact, the company has acquired more than 40 companies in the past few years, and it isn't done yet. Recently, 3D Systems diluted shareholder value by going for a secondary offering. It offered 5.95 million shares, raising around $317 million. The company will use the proceeds to make more acquisitions.
The problem is that these acquisitions don't seem to be reaping any results. Ideally, acquisitions should lead to earnings accretion, but this hasn't happened. In the first quarter, 3D Systems' earnings declined 17% year over year, even though the company continued its rapid acquisition pace.
Speed and pricing
High price and low speed are the two main hurdles in 3D Systems' growth story in the industrial business. If 3D Systems plans to bring out a new 3D printer with lower price and higher speed, it will need to make aggressive investments in various R&D initiatives. On the other hand, its rivals such as HP stand strong with a robust R&D budget and are in a better position to invest in the development of low-cost high speed 3D printers.
As reported by Reuters earlier this year:
Whitman said HP's in-house researchers have resolved limitations involved with the quality of substrates used in the process, which affects the durability of finished products.
"We actually think we've solved these problems," Whitman told an annual shareholders meeting. "The bigger market is going to be in the enterprise space," manufacturing parts and prototypes in ways that were not possible before.
Besides, many companies are making advances to develop super fast 3D printers. For example, Cincinnati Inc. has entered into a partnership with Oak Ridge National Laboratory to develop super fast 3D printers. The projected printing speed of these printers might be 200 to 500 times faster than the existing 3D printers. In addition, they are expected to be capable of printing components that would be 10 times larger.
So, 3D Systems is facing threats from a number of quarters. Also, there are a number of investors betting against the stock, as evidenced by a short float of 32.7%. In addition, the stock is very expensive at 125 times last year's earnings, and considering that its earnings are declining, it doesn't make sense to invest in 3D Systems.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.