Graphene could become a key 3-D printing material
In our February 27 article, we said that while 3-D printing was still in its infancy, a new technology was already making the buzz: 4-D printing. Actually, 4-D printing is an evolution of 3-D printing: instead of building static 3-D items, the technology allows dynamic materials to self-assemble into different shapes after they have been printed, or to evolve over time in response to their environment. In all, 4-D printing is the combination of smart materials that change their shape in response to outside stimuli (water, air, heat or light), with high-resolution 3D printers.
Commercial use is not expected before three to five years, but the technology is likely to change the current 3-D printing landscape. Notably, materials will play a key role in 4-D printing and will, in our view, dramatically change the value chain of the printing industry.
Therefore, we were not surprised a couple of days ago when Stratasys (NASDAQ:SSYS) announced a partnership with private company Graphene Technologies to "develop Graphene-enhanced 3D printing materials". This deal echoes the agreement signed a few months ago by graphite exploration company Lomiko (OTCQX:LMRMF) and Graphene Laboratories to launch "Graphene 3D Labs" for the development of graphene-based 3-D printing materials.
Even if graphene does not change its shape in response to outside stimuli, it's obviously a material of the future. As we explained in a previous article ("Nokia And The Graphene Opportunity"), graphene is a single layer of graphite carbon atoms, making it the thinnest and toughest material ever created. It is also much more conductive than copper and as flexible as rubber. All these qualities offer huge promises for a large number of applications, from IT & consumer electronics to energy, aerospace, medicine... and to 3-D printing!
While plastics and metals are currently the most used materials in 3-D printing, graphene could become a key material in coming years, as it combines the qualities of both plastics and metals: it is extremely strong, yet flexible and lightweight.
Potential margin pressure ahead for printer makers?
Graphene and the above mentioned smart materials are likely to expand the possibilities offered by 3-D printers, confirming that the 3-D printing top line opportunity is huge in the long term. But once again, we question the margin impact for printer makers.
Back in February, we said that due to their rising importance, materials were likely to climb the value chain of the industry over the years, and that material providers were likely to ask for a higher share of the profits on consumables (through notably higher prices) if more complex materials were needed. The fact that Stratasys needs to cooperate with a company like Graphene Technologies on the development of complex materials confirms our view. This suggests that Stratasys is committing opex and/or capex to the project, that it's not able to simply purchase raw materials from a provider and that it is not able to go alone.
As the future of printer makers is mainly dependent on the rise of consumables in their revenue mix and on their profitability, these kinds of deals could put some pressure on the profitability of consumables at printer makers in a not-too-distant future. Note that margins on consumables are already extremely high (74.7% at 3D Systems in Q1), offering obviously more downside than upside.
In all, this strengthens our view that consensus long-term margin expectations are way too high on 3D Systems (NYSE:DDD) and peers.
We reiterate our negative stance on the 3-D printing sector, and specifically our Sell recommendation on 3D Systems. The stock is currently trading at 67x-44x 2014-2015 EPS, a level which is not justified, in our view, by the company's earnings power (+20%-30% a year, in a best-case scenario).
For those willing to invest in the 3-D printing sector in these uncertain times, an interesting and lower-risk strategy remains to go long Stratasys and short 3D Systems. At 45x-30x 2014-2015 EPS, Stratasys' valuation appears much more decent. And importantly, the company is highly innovative (Stratasys is likely to be seen as a pioneer of 4-D printing) and is set to become a dominant force in the consumer business (see the recent deal with Home Depot) that will drive the 3-D printing industry in coming years.
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.
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