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Stratasys, Ltd. (SSYS), 3D Systems Corporation (DDD): Dear 3D Printing, Growth Isn’t Everything

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Stratasys, Ltd.

The world of 3D printing is always exciting with many high profile acquisitions. Stratasys, Ltd. (NASDAQ:SSYS) has seen its stock price grow with its recent acquisition of MakerBot, but the firm is still valued very aggressively. The entire 3D printing market is expected to reach $4 billion around 2015, and the market caps of Stratasys and 3D Systems Corporation (NYSE:DDD) are already above $3.1 billion each. It is time to take a hard look at the bullish arguments used to support such valuations.

Will 3D Printing Take Over the World?

The idea of 3D printing tickles the egalitarian fancy for cheap and effective manufacturing throughout every American house. The reality is a tad different. In 2012, it is estimated that printers available below $5,000 accounted for just 6.5% of all 3D printers sold. The segment’s growth rate has declined from its previous highs. The real growth in the industry comes from using 3D printers to make end products in addition to prototypes. For parts made with expensive metals like titanium, 3D printing is a good way to reduce costs.

When new entrants want to enter the 3D printing market, they are forced to partner with one of the big 3D printing firms. Stratasys, Ltd. (NASDAQ:SSYS) and Hewlett-Packard Company (NYSE:HPQ) have partnered together to create 3D printers under HP’s label, but Hewlett-Packard Company (NYSE:HPQ) remains a traditional tech company. While its printing segment provides 22% of the company’s recent quarterly revenue, its entire consumer hardware sales are only 9% of the segment’s revenue. In comparison, commercial hardware sales provided 23% of the segment’s revenue.

HP is on the rebound with its new moonshot servers. After taking some write-downs last year, it is an attractive value play. While it is expected to post earnings per share (EPS) of $3.65 in 2014, it is important to remember that cheap 3D printers are not driving the firm’s rebound.

Where Are Pubic 3D Printers Heading?

Mass market consumer manufacturing firms like Foxconn see little future for 3D printers. It is in high cost aerospace and medical products where 3D printing is being used to create end products. Stratasys, Ltd. (NASDAQ:SSYS) has over 550 patents and patents pending. The company is active in the medical field and is working with scientists at MIT to print artificial bone. The firm’s photopolymers are used in the production of hearing aids and dental products.

Even with its strong product offerings, potential investors in Stratasys, Ltd. (NASDAQ:SSYS) need to have a long investment horizon to justify its valuation. In 2014, it is expected to post an EPS of just $0.49, while its current stock price is around $80. Thankfully, the company’s balance sheet is clean, with a total debt to equity ratio of 0 and a quick ratio of 2.9.

Like Stratasys, Ltd. (NASDAQ:SSYS), 3D Systems Corporation (NYSE:DDD) sells a number of printers for the medical and aerospace industry. To increase its offerings in the manufacturing sphere, 3D Systems Corporation (NYSE:DDD) recently purchased Phenix Systems. Phenix’s direct metal selective sintering printers are a good fit for the aerospace industry as it uses many high-performance metals.

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