While working at an investment magazine back in the 1990s, I profiled a young technology company with a very intriguing product. This company had a small sales base and struggled to make profits, but its device, which could create fully formed objects in a microwave oven-size device, was right out of Star Trek.
That company, Stratasys, Ltd. (NASDAQ:SSYS) was an early pioneer in the field of “rapid prototyping” — or what’s now known as 3-D printing. (Some also now call this the “additive manufacturing” market.) Stratasys, along with rivals 3D Systems Corporation (NYSE:DDD) and ExOne Co (NASDAQ:XONE) are no longer a well-kept secret. The first two stocks have risen more than 350% over the past two years, and XONE has doubled in value since its early 2013 IPO.
Clearly, the market for these companies’ devices is starting to take off. Stratasys boosted sales more than 30% in 2011 and 2012, its best growth rates since 2004. 3D Systems has boosted growth at an even more impressive 45% clip over the past three years. And all three are expected to boost sales at least 40% this year.
The outlook ahead is also quite bright, as new applications are emerging in the automotive, health care, aerospace and consumer markets. Credit Suisse estimates the industry had roughly $2 billion in sales last year and sees that figure rising to $5 billion by 2016, or a 24% compound annual growth rate. The fact that these stocks trade for at least 35 times projected 2014 profits (and 88 times in the case of XONE) might almost seem justifiable. Investors are paying up now for expected high profit levels down the road.
Yet even as investors bid these stocks ever higher, they may be missing some key speed bumps in the road ahead. It starts with competition.
Last November, General Electric Company (NYSE:GE) acquired a pair of privately held 3-D printing firms, Morris Technologies and Rapid Quality Manufacturing. Although GE hasn’t made a big industry push this year in terms of contract wins, the company has been bolstering its presence at industry trade shows, leading some to expect a bigger competitive push in 2014.
Transforming powdered metal into finished metal parts is expected to be one of the biggest growth areas for the industry, and Sweden-based Arcam appears to have the industry’s strongest capabilities in this niche. Arcam noted a big jump in orders and backlog when six-month results were released in August, leading to expectations of 60% to 65% revenue growth. Competition is also emerging from a handful of other privately held firms that includes EnvisionTEC, Eos and Micor.
|The outlook ahead is quite bright, as new applications are emerging in the automotive, health care, aerospace and consumer markets.|
On the consumer side, known as desktop printers, Formlabs, Printrbot, Leapfrog (not the toy company), RoBo 3D and Solidoodle are all ramping up sales efforts.
The problem with competition is that it tends to lead to more aggressive pricing strategies across the industry. And that will make it harder for 3D Systems and Stratasys to maintain gross margins above 50%, as they did in 2012.
Also, a fast-growing industry means that many of these privately held rivals may soon look to go public (investment bankers likely see them as easy deals to get done in light of the strong investor interest). Once a flurry of new companies goes public in an industry, they use their IPO funds to speed up new product development and expand marketing efforts. So Stratasys, 3D Systems and XONE may be in a golden moment — but, from a competitive perspective, one that may not last.