Seems like hardly a week goes by without another dramatic and seemingly random price swing for 3-D printers. The 3-D printing industry has fascinated investors with its ability to instantly manufacture custom-designed objects and has been name-checked frequently by major media outlets, popular television personalities, and the president of the United States. Industry giants 3D Systems Corporation (NYSE:DDD) and Stratasys, Ltd. (NASDAQ:SSYS) have both shot up more than 100% over the past 12 months, as new interest surges in an industry that’s actually decades old. What’s an investor to make of all this movement?
Author Douglas Adams gave the best advice possible in this situation (and many others): Don’t Panic. Short-term thinking is no good for long-term investors like us, so when 3-D printers have wild price swings on no relevant news, we shouldn’t assume there’s a bursting bubble we need to get away from or a big rally we need to get onboard for. Instead, think about why you’re invested in the company in the first place, and whether anything has happened to change that thesis.
Today, the idea that 3-D printing will continue to grow in popularity isn’t being challenged, but rather investors are worrying whether the price of 3-D printing stocks has simply risen too high, reflecting irrational exuberance that far outpaces realistic outcomes. With the major 3-D printers trading for dizzying prices around 80 times earnings, it’s only realistic to ask if it’s even possible for 3-D printers to deliver on expectations. In this case, it’s useful to look at how big 3-D printing might actually get, by thinking about the addressable market.
It’s difficult to predict what sort of applications 3-D printing will find in a decade or more, so let’s look at what 3-D printers are useful for now. Most obviously, 3-D printers are great at turning out little plastic toys and trinkets. I believe there’s no long-term business opportunity here. The ability to churn out the low-quality machines that make low-quality plastic novelties has become too commoditized to support solid earnings, especially since nonprofits and academic organizations have taken an interest in promoting the technology.
Where commercial 3-D printers such as 3D Systems, Stratasys, and newly public ExOne Co (NASDAQ:XONE) really shine is in the market for high-value, low-volume items that require exacting manufacture and sophisticated print materials. There are two important markets here: prototypes manufactured for the research and development of new products, and health products created to perfectly fit a given human body, including items such as replacement hips, dental fillings, and hearing aids. So just looking at the applications we know 3-D printing can compete in today, what’s the market opportunity look like?
On the life science side, just the market for 3-D-printing-friendly health applications is estimated to be around $40 billion. That dwarfs the current size of the 3-D printing industry, but it looks like chump change compared with 3-D printing’s other major opportunity.
In 2013, the world will spend $1.5 trillionon research and development. This matters, because when you’re designing products for the real world (that includes everything from airfoils to running-shoe soles), it improves the design process to be able to get a physical version of a design to test out, sort of like an industrial first draft. Designers have three choices when making these prototypes: make them by hand, fire up a full-scale factory to produce only a few items, or 3-D print them. Increasingly, industrial designers are finding that 3-D printing isn’t just faster; it’s cheaper. As such, I expect 3-D printing to win in the rapid prototyping space.