Where To Invest In Rapid Prototyping?

May.27.12 | About: 3D Systems (DDD)

The 3D Modeling/Rapid Prototyping (RP) technology sector promises to change the world. The RP technology allows for a design tool that greatly improves the product development cycle by allowing rapid creation of models for testing. Read this article for more information on the sector and leaders.

Unfortunately the concept has limited commercial production capabilities and material challenges. Over time, these will naturally become less and less of a problem. For now though, several sectors such as aviation parts and medical devices can benefit greatly from the ability to RP. Not to mention, any wealthy person that wants to make their own iPhone case at home.

The 3D Printing concept has been around for awhile, but it is just now becoming a mainstream reality with sub $10,000 commercial printers and sub $1,300 home printers.

Below are the leading investment options in the public markets:

3D Systems (NYSE:DDD) is leading the 3D printing market, but unfortunately investors missed the golden opportunity to buy back at the end of December when the stock still traded around $15. It now fetches over $30.

The company reported Q112 results that included 63% revenue growth and solid operating margins of 22%. Earnings only grew 47% to $0.25, but the company has been busy increasing research and development plus adding numerous acquisitions of printer developers and materials.

With a forward PE of 23, the stock trades roughly in line with the expected growth rate. While not cheap, it isn't expensive and actually provides a solid earnings profile unlike most of the recent IPOs in the hot sectors of social media and cloud computing.

The company recently introduced the Cube which provides the ability to bring 3D Printing to home at a cost of $1,299. While as affordable as Mac computers, the functionality will need to improve before many consumers rush out to buy it.

Stratasys (NASDAQ:SSYS) provides another option in 3D printing, but the stock has likewise more than doubled since the lows back in October of last year. The company recently released the Mojo 3D Printer which is the market's lowest-priced professional-grade complete 3D printing system priced at $9,900.

This stock trades at a richer valuation than 3D Systems with a forward PE of over 30. The company also only reported 30% revenue growth for Q112 while analysts only forecast 15% long term growth.

The recent announced merger with Objet is expected to launch Stratasys into a leadership position in the 3D Printing market. The combined company will rival the $1.5B market cap of 3D Systems along with the revenue size.

Proto Labs (NYSE:PRLB) is an alternative investing option in 3D rapid prototyping and manufacturing short-runs of real parts. The company went public back in February, but the stock appears to have a similar pricey multiple as the 3D printing sector.

The company reported 34% revenue growth and a solid 25.5% operating margin. At a forward PE of 29, the company trades in the range of its long term growth rate. With revenue expectations of around $127M for 2012, the company remains relatively small.

For prototype and low to moderate volume tooling, the company provides a drastically reduced lead time and cost. It offers the ability to deliver real injection molded parts as quickly as the next business day.

Conclusion

The investment world has clearly caught up with this sector as the stocks all trade around their growth rates. In a normal growth market, these stocks could even trade near double growth rates.

In the current market environment and traditional weak summer period, investors might be wise to wait for better entry points. This sector offers a lot of long term growth potential, but the market isn't paying up for growth so no reason to rush out at these price levels.

DDD has the largest following on Seeking Alpha and the fastest expected growth rate, making it possibly the best option to buy on dips, though with all the recent acquisitions and the additional option of Proto Labs, the sector remains up for grabs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Please consult your financial advisor before making any investment decisions.