- Consumer 3D printing has a lot of potential, and while the upside is not well understood, I think retail investors/analysts are underestimating this growing category.
- Over the next three years, consumer 3D printing may break past the tipping point, and turn into a household appliance.
- Based on the visibility we’re gaining on consumer 3D printing, I think investors should position themselves through buying 3D Systems, and Stratasys.
I'm starting to warm-up to consumer 3D printing. Not because it's a good bit of technology, but because I believe the technology is a year or two from reaching the tipping point. Therefore, it's an appropriate time to think about the long-term investment potential of 3D printing, as a whole.
You want to know more about 3D Printing?
3D printing sort of reminds me of the computer. Initially a computer was just an overly elegant calculator that could crunch numbers that people could not do by hand. It's what allowed NASA to launch a rocket to the moon, and it's the backbone of the internet. The computer had its hey-day when the graphics user interface pushed the product into the work force at individual scale, and that in turn allowed the development of software licensing as a business model, which in turn unlocked the value proposition of the PC.
Fast forward to 2014, the PC is used in just about every industry, and it's become an item that's used to consume entertainment. The PC improves productivity in all sectors of the economy whether it is finance, services, automobiles, industrials, basic materials, energy, etc.
I think 3D printers are the next big thing. 3D printing will create industries that don't exist, and will solve problem we don't know we have. In other words, 3D printing falls into the same league as the telephone, electricity, combustion engine, airplanes, computing/semiconductors, and the internet.
Many of you are probably familiar with the 3D printer, but let's get a basic review of its current capabilities:
- 3D printing is the printing of physical objects using additive manufacturing techniques that come from computer-designed models.
- 3D printing is known to be effective for proto-typing, special assembly, unique component creation, and is also useful when re-tooling a production assembly.
- 3D printers have flexibility with basic and advanced materials and can be used as a way to create plastic or metal parts.
These unique characteristics are what allow 3D printer to create prosthetic arms, quickly re-tool machines on an assembly line with the appropriate nuts/bolts, and allows for the quick creation of specialized prototypes regardless of design or material specifications.
But, there's more...
Between, 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS) it's hard to compare the two, as both companies offer a ton of growth potential and have relatively high upside characteristics due to industry growth trends that put the two companies at the forefront of one of the most rapidly disruptive innovations in the world.
Source: 3D Systems
As you can tell, 3D Systems projects a 32% CAGR for the industry as a whole. By 2020, the industry may grow to $21 billion, but from my understanding, it looks like an extremely conservative long-term forecast.
3D Systems believes that it can stabilize its cost structure even as it takes advantage of organic growth. This is very different from other high momentum names, as the business is expected to exhibit high top-line growth, with high profit margins.
A rapidly growing cash cow!? Uh... let me in!
Furthermore, 3D Systems mentions that the industry is set to accelerate its growth due to factors like R&D, economics, and shorter product life cycles.
Source: 3D Systems
Let's explain the economics component in a little more detail. For starters, 3D printers have fixed cost of printing regardless of complexity. To put this in another way, a standard manufacturing lines greatest weakness is low scale production with high customization. We see this in semiconductors, component assembly, etc.
So, what we're going to see in the future, is that 3D printing will cost less, even as the complexity of the same exact product stays the same. This is an entry-level discussion to short-term cost curves, but let's open the discussion anyway.
Quoted From: MBA Economics
So, as you can tell, there are five short-run average cost curves, and each incremental short-run average cost curve ends up shifting over time. This is due to factors like production possibilities, and technology. But, usually, production ramp is what causes the short-run curve to shift continually. Eventually, it's thought that even if you were to produce more and more units, the cost of production wouldn't decline by much. We see this in semiconductors where even at GIGA FAB, the cost curve cannot improve by much even as unit volumes exceed 100 million. Some economists go onto mention, that at the extreme end of the right hand curve, production doesn't scale very effectively as costs end up increasing well ahead of what companies can effectively manage. Anyway, that's just all theory, let's move onto what's really important.
In the case of 3D Systems, you probably have an inverse relationship, meaning that as quantities get smaller, the cost stays constant. The cost of producing a product doesn't change by much even as the complexity of producing the product increases. This means low volume or high volume production essentially have the same cost. What changes however, is that technology will reduce the fixed cost, which will allow producers to focus on producing items that go to the far-end of the long-tail.
Quoted from: Actionable Books
Initially, it was thought that the internet would bring exposure to niche products. However, 3D printing is what allows physical product to exhibit the same characteristics of non-physical products that are sold over the internet.
Think of it another way, Seeking Alpha tries to bring exposure to stocks that are under-covered, basically at the far edges of the long-tail. But because the economic constraints of it are so intense, it's only through a crowd sourced platform that operates at enormous economies of scale we can afford to do this.
Well in the case of 3D printing, the cost of producing niche product will continue to decline as innovation makes 3D printers more competent. This will allow smaller firms to build products that are niche focused. Eventually, niche-focused products can grow into a very prosperous industry, as illustrated by the growing use of 3D printing in prosthetics, and specialized manufacturing.
The business model flips, and that's why we call it a disruptive technology. This is why I believe 3D printing isn't hype, but rather it's the real deal.
Earlier, I mentioned that 3D Systems projects that the industry will grow to $21 billion by 2020. Compared to the combined revenue of Stratasys, and 3D Systems at $997 million, for calendar year 2013 -- there's ample growth left, for these two industry stalwarts.
But here's where things get really interesting...
After many hours of reading white papers, and statistical insights from various sources around the web; I have allowed a data point slip past me.
According to RBC Capital Analyst, Amit Daryanani:
Of the ~1,300 survey respondents, only 80 indicated they currently own a consumer 3D printer or utilize a consumer 3D printer at work (6% of total survey applicants). However, an additional ~100 respondents stated that while they do not currently own or work with a consumer 3D printer, they plan to purchase one within the next 12 months. Thus, our survey highlights the 183 responses (14% of total survey applicants) from individuals who already own or are expected to purchase a consumer 3D printer in the future.
We're starting to enter the early adopter's stage of the innovation diffusion curve. This is because out of a random population sample, approximately 14% either own, or plan to purchase a 3D printer over the next 12 months (commercial not household).
This is well ahead of my expectations, and assuming another sizeable chunk of companies buys a 3D printer, the product can finally climb over the hump and reach the tipping point.
We're at a juncture point in 3D printing. Either it goes mainstream, or it remains a product that's segregated into its own specific niche. Remember, the original Macintosh was nowhere near as effective or useful as it is today; likewise, future iterations of 3D printers are likely to be more useful, and better as time goes on.
Owning a 3D printer is a novelty. But, it may stretch the imagination of mechanical engineering students, or it may allow the computer geek (I mean this respectfully) to create things that exist at the very crevices of the imagination.
I'm sure a 3D printer will look nice next to a refrigerator, or the stove. Maybe it will go next to the washer machine. Who knows?
Could it become a household product? The data points out that it can. However, as readers have pointed out in the comment section (thank you), the current penetration rate only applies to companies, and therefore, the tipping point in the business-environment has yet to come. However assuming the adoption rate from businesses continue to trend higher, the product will transition into more of a consumer product.
The 3D printer has a lot of growth potential, and I'm willing to bet that over the next three years, we'll get a better idea on whether the device can finally push past the early adopter's stage, and reach the early majority. Assuming, the device pushes past the tipping point, 3D printing will be on a glide path to phenomenal growth.
With 3D printers becoming more common in the work-place, at a 35% ten-year CAGR it's likely that we'll reach the tipping point over the next three to five years.
Assuming 3D Printing technology becomes increasingly productive, products that live on the far-fringes of the tail, will become increasingly profitable to produce, and custom physical goods/components will re-shape the world, but in ways, I simply don't know.
Originally, the article had contained some material errors, but with the help of the SA reader base, I was able to sort this out. Truthfully we're a crowd sourced platform. I encourage readers to comment, and offer feedback. It helps other readers, and it also helps the authors!