- There are flaws with Stratasys' recently completed transaction.
- In a recent presentation, Stratasys CEO, David Reis indicated more acquisitions may be in the works.
- Patent weakness by competitor 3D Systems may allow for entry into laser-based printing.
- Zecotek stands out as an acquisition target, based on the above.
3D printing is here to stay. Once written off as more hype than substance, strong growth of the overall 3D printing market has done well in bringing 3D printing companies back to their formerly frothy valuations. With the global market for 3D printing expected to reach $16.2 billion by 2018, which represents a massive CAGR of 45%, it's easy to see why 3D printing stocks have been on a surge this year.
Despite the strong overall growth of the novel sub-industry, it is important to note that growth among the larger players in the space has been largely inorganic rather than organic. But don't get me wrong - this is a good thing! Strong inorganic growth is indicative of an expanding sector driven by innovation. Growth by acquisition allows for larger companies to solidify their position within the rapidly changing ecosystem. This is especially important within 3D printing, where acquisition allows the company to rapidly grow an expansive patent portfolio and infrastructure with minimal commitment of time.
Stratasys on Acquisition Spree
On this note, it appears that Stratasys (NASDAQ:SSYS) too, has caught the acquisition bug pervading the 3D printing space. Taking a leaf out from competitor 3D Systems' (NYSE:DDD) book, since Stratasys' acquisition of MakerBot Industries for $403 million in June of last year, the company has gone on an acquisition spree, having announced two additional acquisitions earlier this year.
Following this announcement, in a presentation at Bank of America's Global Technology Conference, Stratasys CEO, David Reis stated:
"In addition, we continue position the company for future growth to enhancement to our organization structure and to strategic investment in channel, product and technology development. We believe this investments combined with our ongoing acquisition strategy will support our growth objective of position of market-leader going forward."
It's quite obvious that Stratasys plans on continuing asset acquisitions over the following year. The company is well-primed to do so, with over $600 million in cash stated on its balance sheet as of its last quarter. Stratasys recently completed its acquisition of Solid Concepts, and expects to complete its acquisition of Harvest Technologies by the end of this month. The Solid Concepts deal was for $295 million in cash or stock or a possible combination of the two, while the terms of the Harvest Technologies deal remain undisclosed - this represents $300 million in cash remaining on the balance sheet for Stratasys in the worst-case scenario (cash in lieu of stock). Additional visibility regarding the company's cash position is expected August 7, when the company will discuss its second-quarter financial results. Regardless, it's easy to see that the company still has another bullet in the chamber for an acquisition.
Who will Stratasys acquire next?
The question becomes, what company will Stratasys acquire next? Luckily for us, Stratasys' recent acquisitions of Solid Concepts and Harvest Technologies, in addition to the recent developments for competitor 3D Systems may point us in the right direction.
The first, most striking aspect of the Solid Concepts and Harvest Technologies acquisition is the fact that both companies are not 3D printer manufacturers, but rather service providers. The former of the acquired entities is the largest independent 3D printing service bureau (think Kinko's for 3D printing) in North America. However, this becomes increasingly interesting, especially when examining Solid Concept's 3D printing offerings relative to Stratasys' 3D printing technology. If you're confused, this will become clear in a moment.
Solid Concepts offers the following 3D printing solutions:
1) PolyJet (Stratasys)
3) Selective Laser Sintering/SLS
4) Direct Metal Laser Sintering/DMLS
5) Fused Deposition Modeling/FDM (Stratasys)
6) 3D Color Printing
7) ID-Light (Solid Concepts' proprietary technology, which utilizes both SLA and FDM)
It's exceedingly clear that the majority of Solid Concepts' offerings are not Stratasys products, but rather 3D printing technologies that revolve around lasers - a hallmark of 3D Systems' technology, unfortunately throwing a wrench into the vertical intended when Stratasys acquired these assets. As it stands, Stratasys has two options regarding its new service provider:
1) Continue Solid Concepts' operations as it did prior to the acquisition.
2) Eliminate laser-based 3D printing from Solid Concepts' printing offerings.
Of these two options, it is unclear which is the greater evil. The first choice is clearly the most profitable option for Stratasys, but unfortunately, will continue to profit 3D Systems as well. The other option will eliminate 3D Systems' presence in the operation entirely, but will result in a material impact to the $65 million generated in revenue (from 2013). However, what if there were a third option, where Stratasys was able to make its debut into the laser-based 3D printing space?
How would this be possible? To be sure, the war brewing in the 3D printing space will be fought over patents rather than market share. I say this because in a rapidly innovating industry, market share is prone to rapid fluctuations predicated upon technological advances. Don't believe me? Consider Blackberry/Research in Motion during the smartphone boom. To this note, 3D Systems has aggressively engaged in M&A activity, resulting in 39 acquisitions in the last four years, allowing the company to secure numerous patents, where in 2013, 3D Systems had 973 patents issued, with 204 pending worldwide, with special focus on protecting its laser-based technologies. Similarly, Stratasys holds over 550 patents protecting its FDM (Fused Deposition Modeling) and Polyjet-based technologies, thanks to a few M&A-related deals.
As such, patent expiries will remain on the forefront of the companies' strategy. Consider Stratasys' acquisition of MakerBot for $403 million in 2013. The roots of the acquisition actually go back to 2009, when Stratasys lost exclusivity of the original patent for FDM. This sparked a frenzy of open source activity within the 3D printing space, creating many companies - among them, one named MakerBot. A repeat of history may be happening to 3D Systems as well, as several relevant patents in SLA (Stereolithography) and one of its SLS (Selective Laser Sintering) expired earlier this year, potentially opening the door for a wide number of entrants into 3D Systems' formerly uncontested domain.
3D Systems' patent weakness may already be showing. To this point, consider the original lawsuit between the company and Formlabs over the latter company's wildly successful Kickstarter project - the "Form 1" 3D printer. The lawsuit filed in late 2012 also named Kickstarter as a named defendant, where 3D Systems alleged that Formlabs' printer directly infringed its "520 patent covering methods for "stereolithographically forming a three-dimensional object from a material capable of physical transformation upon exposure to synergistic stimulation." Nothing ever came from this original lawsuit, instead, both parties agreed to a series of time extensions. Later culminating in a notice of voluntary dismissal filed on November 8, 2013.
Although this led many to believe that a settlement would occur, 3D Systems instead filed a new action for patent infringement against Formlabs. The new action, interestingly, dropped Kickstarter as a named defendant and the original claims of infringement based on the '520 patent. With another extension filed by Formlabs, the lack of activity and change of the original action leads me to believe that 3D Systems' stranglehold over laser-based 3D printing technologies may be in meaningful risk, allowing for new entrants.
Let's summarize the above to get a strong picture of what exactly we believe Stratasys will try to acquire.
- Market share tends to be predicated upon innovation in a rapidly growing industry, therefore 3D printing will be fought and won over patents rather than market share.
- Stratasys has recently acquired the largest 3D printing service provider in North America.
- Unfortunately, a significant portion of the service provider's offerings is based upon its competitor 3D Systems' technologies.
- Recently, 3D Systems has lost some key patents protecting its laser-based technology. This is supported by the lack of definitive action in the company's favor in its ongoing legal battle with Formlabs.
- Stratasys CEO, David Reis has indicated the potential for additional M&A activity in a recent presentation. Stratasys will have roughly $300-$600 million following the completion of its recent acquisitions (terms regarding if it was a stock or cash transaction will be elucidated in its Q2 Financial Results call in the first week of August).
Based on the above, an acquisition of a company with expertise in the laser 3D printing space would allow Stratasys to make optimal usage of its new acquisition, while simultaneously challenging 3D Systems' position within the 3D printing ecosystem. Of the many companies I have reviewed, Zecotek Photonics (OTCPK:ZMSPF) seems to fit this description to a tee.
Is Zecotek Stratasys' next acquisition?
Zecotek Photonics is a Canadian company that is focused on the development and application of technologies based on light. In operation for a decade, the company has built on its knowledge of photonics by developing applications for imaging, laser, and 3D display systems for applications in multiple sectors. While doing so, Zecotek has built an impressive portfolio of over 50 global patents, stemming from its multiple research labs located in Canada, Korea, Russia, and Singapore. The company is composed of three distinct divisions: Zecotek Imaging Systems Ltd., Zecotek Laser Systems Ltd., and Zecotek Display Systems Ltd.
Currently sporting a valuation of roughly $60 million, the company trades on the TSX Venture Exchange, Frankfurt Exchange, and the OTC market. While developing light-based technologies, the former focus of the company has been primarily within its imaging systems division. The products of the imaging division point towards the strong science of the company having been fully validated with a commercialization partnership with Japanese optoelectronics giant Hamamatsu (does $1 billion in annual sales), in addition to a multi-year research partnership with CERN for the utilization of Zecotek's imaging products for the next generation of the Large Hadron Collider.
There exists a strong synergy between photonics and 3D printing technology. Zecotek has recently realized the strong potential in the application of its laser and display systems within the burgeoning industry, and has been making strong advances over the past six months. As mentioned earlier, laser-based 3D printers represent a significant portion of the market, due to the fine level of precision that lasers can confer over the end-product. The timing may be strategic, as key patent expiries from 3D Systems may be allowing for the emergence of new technologies with applications in laser-based 3D printing.
Zecotek's laser division may have technology that is better suited for use in 3D printers than the current standard. The company specializes in fiber lasers, which on many fronts, appear to be the best-suited laser type for printing applications. To illustrate, here are the advantages of fiber lasers over other types:
- Light is already coupled into a flexible fiber, this allows the light to be easily delivered to a movable focusing element (a crucial component of a movable laser head seen in many 3D printers).
- High output power: Due to the fiber's high surface area-to-volume ratio, efficient cooling is allowed, which subsequently allow for high level of output power crucial for laser sintering 3D printing.
- High optical quality: The fiber's waveguiding properties reduce or eliminate thermal distortion of the optical path, typically producing a diffraction-limited, high-quality optical beam.
These features are crucial for high-quality laser-based 3D printers; moreover, fiber lasers have the added benefit of being generally smaller in design than most conventional laser systems. I believe fiber lasers will be part of the company's proprietary 3D printer due to the partnership the company has with Armenian company LT-PYRKAL. LT-PYRKAL's expertise lays in the production of optics, in particular synthetic sapphire crystals that are of optical-grade quality. This is of particular interest given research published in 2012, where the first experimental demonstration of efficient and high-power operation of a Ti:Sapphire laser was pumped by a fiber laser-based source. Results indicate the laser operated fine with air cooling, despite emitting a high-power laser in a continuous wave. Logic and an understanding of 3D printers imply that an application of this technology using LT-PYRKAL's sapphire crystals and Zecotek's fiber laser know-how could allow for a faster and more precise 3D printer.
Moreover, recent press releases indicate the 3D printer in development is one of Direct Metal Laser Sintering design. Currently, 3D printing with metal represents the next frontier of the industry, with massive implications for complex machinery unable to be created due to current limitations in technology. Although the number of alloys currently used in DMLS printing are limited, a laser of a better design may hold the key for the utilization of additional alloys.
Synergy with Display Division and Validation
As mentioned by fellow contributor 3D Printing Investor in an earlier article, Zecotek's advances in the 3D printing space have strong and novel synergy with its display division. The display division's claim to fame is its true, auto-stereoscopic 3D2D display system. In other words, it is a true 3D TV that does not require glasses, with an image that "moves". What is meant by "move" is that when the viewer moves their head, the image appears to "change" relative to the viewer's change in viewpoint. In other words, the ability to look around objects on the flat TV screen. If this sounds counterintuitive, I encourage you to read the whitepaper.
As mentioned by 3D Printing Investor, the display technology coupled to a 3D printer should allow for the most true-to-life display. As such, users of such a printer could realize meaningful advantages in design, cost, and time. Moreover, as the software back-end continues to improve for the display system, this will allow for perhaps more novel applications, such as the following - with the advent of modern physics simulation programs, the user may be to render and visualize a 3D printed object undergoing its intended use prior to actual printing, potentially saving time and costly material.
Zecotek and its technology in 3D printing applications have been recently validated. Earlier this month, Russia's largest computer company, Aquarius, signed a letter of intent to acquire 20% of Zecotek's wholly-owned subsidiary, Zecotek Display Systems, for $7 million. The investment is intended to complete the commercialization of two patented 3D displays for flat-screen and large-screen formats, and a novel, high-speed 3D printer. Aquarius is the National Computer Corporation, one of the top 100 companies in Russia by sales volume.
Although the 3D printing market has grown massively over the past few years, it is still a fledgling market. Correspondingly, the 3D printing market has not hit the saturation point yet, allowing for a plethora of players that have found their niche within the space without entering direct competition with each other. This is possible due to the expansive nature of 3D printing. This begs the question, why would Stratasys acquire Zecotek over other entities operating in the 3D printing arena?
To answer the question, the following is a list of other public companies in the "3D printing" business. 3D Systems, Arcam AB (OTCPK:AMAVF), ExOne (NASDAQ:XONE), Voxeljet AG (NYSE:VJET), Materialise (NASDAQ:MTLS), Sigma Labs (OTCQB:SGLB), Cimatron (NASDAQ:CIMT), RTI International Metals (NYSE:RTI), and ARC Group Worldwide (NASDAQ:ARCW). Although there are many more in the space, I have chosen the companies most associated with the technology. Of these companies, several can be excluded due to market capitalization. As mentioned earlier - Stratasys' cash position should be in the ballpark of $300-$600 million; transparency will come this Thursday during the company's Q2 Financial Results Call. Filtering the list above to omit companies with capitalization over $300 million results in the following list:
Cimatron (market capitalization: $63 million), Sigma Labs ($72 million), ARC Group ($208 million), and Voxeljet ($252 million). The following are brief descriptions of each company.
- Cimatron focuses on the development and distribution of computer-aided design and manufacturing (CAD/CAM) software, essential tools in the utilization of 3D printers. It is currently ranked among the top ten CAD/CAM suppliers. Cimatron is currently attempting to branch into the 3D printer market.
- Sigma Labs develops advanced, real-time, non-destructive inspection systems for 3D metal printing, known as PrintRite3D. The quality control technology allows for the elimination of time-intensive post-manufacturing inspection. Sigma Labs has announced its intention to develop "low-cost metals 3D printers" in the future.
- ARC Group Worldwide is the largest metal injection molding company in the world. Although similar in purpose, metal injection molding is not a 3D printing technology. The company has recently added 3D printing services to its repertoire by launching its 3D Material Technologies division.
- Voxeljet focuses on the development and sales of 3D printers, utilizing a powder-bed and inkjet head technology. The printers are able to print in plastic and silica sand. The company also operates one of Europe's largest service centers for production of metal-casting molds and models.
With the exception of Voxeljet, these companies do not have a proprietary 3D printing technology. To this point, Cimatron, Sigma Labs, and ARC Group can be seen as "service providers" within the 3D printing space. With respect to Stratasys' current status in the 3D printing space, an examination of the listed companies reveals little to no synergy with Stratasys.
Cimatron, although a developer of CAD/CAM software that can be applied to 3D printer, would fail to materially benefit Stratasys, due to the existence of many other CAD/CAM software developers. Moreover, although Cimatron has expressed interest in manufacturing 3D printers, it remains unclear as to what 3D printing technology would be utilized. Sigma Labs may also be a possible acquisition target for Stratasys in the future. Although the value of Sigma Labs' quality control technology is clear, it is currently limited to 3D Metal Printers, which Stratasys does not have. An acquisition at this point is highly unlikely given that Sigma Labs does not have a proprietary metal printer yet. An acquisition of ARC Group is highly unlikely given Stratasys' recent acquisition of Solid Concepts, a major 3D printing service provider. As far as I can tell, ARC Group currently lacks any novel 3D printing technology. Finally, although Voxeljet does indeed have its own 3D printing technology and its own service center, it is precisely for these reasons the company appears unfavorable to Stratasys. With the recent acquisition of Solid Concepts, there is little reason why Stratasys would elect to acquire another large service center.
In contrast to its "competitors", Zecotek stands out as a suitable acquisition for Stratasys. At its current capitalization of $54 million, Zecotek is the cheapest among the companies mentioned. More importantly, for reasons mentioned above, the company's assets have strong synergy with Stratasys as it currently stands. An acquisition of Zecotek would allow Stratasys to possibly move into the laser-based 3D printing domain of 3D Systems, maximizing the value generated from its recent acquisition of Solid Concepts. Strong validation from CERN, Hamamatsu (a multi-billion dollar company), and Aquarius attest to the value seen within Zecotek's technology.
As a micro-cap company, there are a few salient risks the intelligent investor should consider.
1) Liquidity Risk: Zecotek currently trades on the OTC markets under the ticker ZMSPF. The 3-month average share volume is 152,000, which may restrict an investor's ability to get in and out of a position as desired. Investors may find additional liquidity by looking through the company's TSX Venture listing, ZMS.V.
2) Financing Risk: As with many micro-cap companies, there exists some level of financing risk. Like many 3D printing companies, Zecotek is not yet profitable. According to the company's most recent financial statement, Zecotek has over $2 million in cash listed on its balance sheet. Outstanding warrants priced from $0.50 to $0.75 will allow the company to raise up to an additional $10 million in warrant exercises, diminishing any major financing concerns.
3) Patent Risk: Given the litigious history of 3D printing companies, there is the possibility that Zecotek may face some patent troubles heading towards commercialization of its 3D printing technologies. Investors who have been following the company should be aware of Zecotek's current legal battles with Saint-Gobain and Philips Healthcare. As a result of these proceedings, Zecotek has since entered into a collaboration agreement with Intellectual Ventures, one of the top-five patent owners of U.S. Patents, notorious for engaging and winning massive patent battles. The collaboration agreement with Intellectual Ventures attenuates the potential patent risk.
4) Sector Risk: Given the fledgling nature of 3D printing, a new breakthrough could easily render the majority of 3D printing technology obsolete. With this said, the robust growth of the 3D printing market does not appear it will stop anytime soon.
Returning to Stratasys, the company has done an exceptional job threading the needle between organic and inorganic growth, while maintaining a strong patent portfolio over its Fused Deposition Modeling and PolyJet printing technologies. At the same time, it is clear that the company is becoming more open to making strategic acquisitions as they present themselves. However, when examining the company's most recent acquisition of Solid Concepts, it's clear that there are a few problems Stratasys will have to address heading forward. Although it has served to establish a strong vertical in the 3D printing space, there are some inefficiencies as Solid Concepts currently stands. Given this, in addition to the recent weakness 3D Systems has displayed in the strength of its laser-based printing patent portfolio, Zecotek stands out as a strong acquisition target in terms of both its current valuation and novel technologies. With one acquisition, Stratasys would be able to maximize the value of its $295-million purchase, while dealing a one-two punch to 3D Systems (removal of Solid Concepts revenue and entry into laser-based printing). Zecotek's strong patent portfolio only serves to sweeten the deal. Zecotek's current valuation of $54 million is laughably small compared to the $300-$600 million in cash Stratasys holds. 3D printing assets are typically acquired at large premiums, and if history is any indication, an acquisition on the order of $120 million might not be too far-fetched. Moreover, if the acquisition of Zecotek has the potential to bolster 3D Systems' current patent deficiencies, this could prompt a defensive acquisition. Investors should look forward to further transparency by Stratasys this Thursday as the company discusses it second-quarter financial results.
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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