3D Printing: Why Hewlett-Packard Must Make An Acquisition

Jun. 5.12 | About: HP Inc. (HPQ)

Have you heard about 3D Printing? It will soon revolutionize the world of manufacturing, bringing back jobs to America. The possibilities are endless. Imagine printing buildings or airplanes- it's possible. Imagine buying your children's toys online and downloading the instructions to your 3D printer, allowing you to print the toy from the comfort of your own home-it's possible. This might seem like a pipedream, but it's not. The technology has actually been around for more than 25 years.

3D printing was invented by Charles Hull in 1984. The Economist explains that 3D printing has become known as, "additive" manufacturing (as opposed to the old, "subtractive" business of cutting, drilling and bashing metal). The additive process requires less raw material and, because software drives 3D printers, each item can be made differently without costly retooling." 3D printing uses materials such as plastics and metals, instead of ink. If you were to make an airplane part out of titanium, you would use a titanium powder in a tray. Scan the item you want to print, and the software will print, layer by layer, mixing a liquid binder to form the powder into a solid. If you still can't grasp the idea watch this 5 minute video from the National Geographic, it will demonstrate up close how a 3D printer works.

Hewlett-Packard (NYSE:HPQ) is the largest printer company in the world. In April 2010, HPQ signed a collaboration agreement with one of the 3D printer companies, Stratasys (NASDAQ:SSYS) to create a 3D printer called DesignJet 3D. The retail price was over $17,000 when they first came out, and it doesn't appear that HPQ is making a giant impact with this printer.

HPQ needs to come and buy either SSYS or 3D Systems (NYSE:DDD). HPQ needs to play defense, by going on the offensive. It might not seem like it, but this is the same scenario as Eastman Kodak being the 800-pound gorilla in cameras and then falling behind when the time came for digital cameras. HPQ doesn't want to miss out on this revolution. 3D printing is within 3-5 years of becoming affordable for the general public. 3D Systems has launched a personal 3D printer for as cheap as $1300. Moore's Law is working in the 3D printing market as prices have drop 90% in the last 5 years and will continue to drop in the future.

3D printers are starting to be used more and more in actual production lines, rather than just for making prototypes. The Economist cites that 20% of all output from 3D printers is currently producing final products rather than prototypes. And it is expected that by 2020 that number will rise to more than 50%. HPQ has a chance to really make 3D printers a mass-market product, as prices fall into the $400-$700 range and there is further consumer awareness. Consumers can be convinced that they need a 3D printer just like Steve Jobs convinced consumers they needed IPod's and IPad's.

Other companies that I can see making an acquisition in the 3D market include General Electric (NYSE:GE) and 3M (NYSE:MMM). GE has large operations in fields such as airplane engines, medical devices, and home appliances. All of these can be made in the future with less material and energy. Airplane parts made out of titanium have to use titanium billets. When cutting away titanium in traditional manufacturing, they can waste up to 90% of the titanium, which can't be reused. But when using the 3D printing, it allows you to make the part out of titanium powder, reducing any wasted materials. 3M also have divisions that would benefit from adding a 3D printing division. The company has industrial, healthcare and consumer businesses.

I wouldn't be surprised if it takes more than a year until HPQ, GE, or MMM make an acquisition in 3D printing as they allow the industry to continue to mature. If these management teams don't want to fall behind, they have to make these acquisitions a necessity or someone else will beat them to the punch.

Currently, DDD and SSYS continue to make small acquisitions to bolster their position in the 3D market. They trade at 34-35x 2012 expected earnings. Neither is cheap at current prices, but the growth is becoming apparent to institutional investors. If the European debt crisis spreads and causes a global recession, these stocks will sell off sharply. Both are in the "razor and razorblades" business model and would see printer material (the ink of a 3D printer) sales drop if manufacturing sees a slump. However, any major weakness should be bought, as these companies will bounce back very quickly from a recession.

For HPQ, GE, and MMM an acquisition of a 3D printing company would look like a small bolt on acquisition. However, as time goes on, the acquisitions will look smart and help ensure future growth for the companies. The 3D printing technology will be disruptive in more ways than are imaginable.

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