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Is 3D Systems A Good Investment?

On January 9th of this year, 3D Systems (NYSE:DDD) announced the release of the first-ever three dimensional (3D) printer for consumers.  Priced at $1300, about the same as mid-range lap top, the Cube comes out of the box ready to print usable objects in a variety of colors.  The company gives you 50 free designs and has launched the Cubify community for 3D hobbyists wherein people can share open-source designs and experience.

3D Systems Corporation (NYSE:DDD)

Is the Cube going to be a phenomenon like the Apple computer?  Certainly 3D Systems is doing everything in its power to make that happen.  You may not think that a 3D printer is what every household is longing for, but very few people thought that consumers needed computers when the garage-built Apple I computer went on sale in 1976.

There is already a community of 3D printing enthusiasts.  Some have been loosely organized in a group by the Fab@home Project,   which hopes to bring personal fabrication to your home.   They hope to free consumers from reliance on manufacturers and retailers by allowing them to build their own custom-made stuff.

While there is a great variety in 3d printing systems, the Cube resembles an ink jet printer, except that it uses plastic instead of ink and prints in three dimensions.  Objects are created by layering material in small increments.

The Cube, so far, is only a small part of 3D Systems’ business.  The company and the process of 3D printing have actually been around almost as long as the personal computer.  3D printing has been and still is primarily used for prototyping, creating a one-of-a-kind object using a CAD design.  The printed object can be tweaked as desired and then used to create an injection mold for mass production.

However, as the printers have improved and the range of materials that they can use has increased, it is easier, in some cases, to use the printers as general purpose manufacturing devices.  This is especially true when production runs are small.    3D Systems makes printers that can use materials as diverse as titanium and chocolate.   Titanium is used widely to make high strength parts for airplanes.  Creating parts for military jets is not a high volume business; hence a printer may be the manufacturing instrument of choice.

3D Systems’ business has been growing rapidly.  Revenues expanded from $113 million in 2009 to $230 million in 2011 and are expected to increase to $347 million this year, a hefty chunk of the entire industry.   Profits went up from $0.03 a share in 2009 to $0.70 per share in 2011, and are expected to reach $1.15 this year.

3D Systems have been rolling up the smaller players in the 3D printing industry, which has allowed the company to increase its capabilities and markets, while eliminating competition.   For instance, in May of this year, it acquired Bespoke Innovations, a company that uses 3D scanning and printing to make custom fit prosthetics, orthotics, and orthopedic devices.  3D printing is an exceptional tool for prosthetics since one-of-a-kind products can be made exactly tailored to the individual.   Also in May, 3D Systems acquired Fresh Fiber B.V., an Amsterdam-based company that makes printed consumer goods, particularly electronics accessories, like iPhone cases.   In April 17th, 3D acquired Paramount Systems, which designs and manufactures goods for the aerospace and medical industries using 3D’s selective laser sintering production printers.   On April 10th, 3D added My Robot Nation to its collection; Robot Nation uses 3D printing to go from design on a computer browser to consumer objects like toy robots.   3D systems expects to merge the company into its Cubify community designed to promote its Cube consumer printer.

All of these acquisitions have diminished 3D Systems’ cash hoard, but most will add quickly to the bottom line.  3D Systems’ major competition now is a company called Stratasys (NASDAQ: SSYS), whose major business is rapid prototyping.  So far, Stratasys has stayed out of the consumer business.  Stratasys is merging with Israel-based Objet Ltd, which dropped plans for an IPO in favor of the merger.  The combined businesses will be almost as large as 3D Systems is now.

Of the two companies, I prefer 3D because 1) it is the largest in the space, 2) it has an early movers edge in the consumer space, and 3) I like its business model.  3D actually does not make most of its money selling printers.  It actually makes more selling the materials that the printers use for printing.  Just like the 2D versions, you end up spending more money for the ink than the printer, and each printer that is sold adds to 3D’s customer base.  The company makes more money still on an amorphous category called “service” which can include things like help with rapid prototyping or aiding companies in their manufacturing strategy.   This takes a page from the IBM (NYSE:  IBM) playbook; IBM makes more money on service than it does making products. Kleinheinz Capital and Richard Driehaus are also bullish about DDD, initiating new positions during the first quarter (see Richard Driehaus’ new stock picks).

3D printing is unlikely to replace manufacturing as we know it and throw millions of Chinese out of work, but it certainly has a place for use in small production runs, and medical products where individual customization is involved.  The business will continue to grow rapidly.

Note: This article is written by Steven Edwards.

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