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It's been a great year for 3D Systems (NYSE: DDD ) and 3-D printing peer Stratasys (Nasdaq: SSYS ) . Both companies have more than doubled since the start of 2012, leading investors to some of the market's best gains:
Financial results have been solid, but perhaps not quite as impressive as the rise in stock prices might imply. Let's take a look at the three biggest issues facing both companies today, for a better understanding of the risks and opportunities ahead.
1. Can 3-D printing adoption accelerate?
Stratasys should complete its merger with Objet soon, but its most recent results were strong without any acquisition-fueled boost: a 31% increase in sales on 23% more units sold year over year. 3D Systems saw even better growth in the top line than Stratasys.
3-D printing is clearly a growth industry, which has earned both companies premium prices -- but frequent Foolish readers are well aware of what happens when the market stops believing in the long-term potential of a hot growth stock. Two examples from last year show this trend perfectly: Netflix (Nasdaq: NFLX ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) .
In each case, the deceleration of revenue growth hamstrung each company's stock price. The downtrends in revenue growth neatly match up to major stock drops. In Netflix's case, its profit margin tanked as well, but Green Mountain's profit margins have remained relatively stable. Decelerating growth could be devastating to 3D Systems and Stratasys, as their most compelling buy argument hinges on stratospheric growth rates.
2. Can print materials drive future growth, or will they be commoditized?
3D Systems' most recent quarterly report offered a good breakdown of the company's segment growth. Printer sales saw the greatest gains, with a 61.1% year-over-year increase, followed closely by printer materials at 59.8%, with service revenues bringing up the rear with a 39.1% year-over-year growth rate.
Ultimately, print materials should become the primary driver of growth in this industry, much as they are for paper-based printing. As users do more with their 3-D printers, they'll obviously need more material. The big question in this regard is whether wider adoption of 3-D printing will result in a material-sales boom, or if it will be commoditized. Hewlett-Packard's (NYSE: HPQ ) printing segment has declined year over year, and that's led by shrinking sales of print supplies. It's easy to find generic print cartridges if one knows where to look.
There's nothing unique about the ABS plastic most often used in 3-D printing, but material diversity (a subject I've repeatedly covered in the past) could help slow or halt the movement toward commoditization. Objet, for example, boasts "107 proprietary inkjet-based photopolymer materials … from rigid to rubber-like, glass-like transparency to opaque color shades, and from standard to engineering plastics." If the material options offered by 3D Systems and Stratasys stay a step or two ahead of generic competitors, then the companies ought to be better able to resist commoditization.
3. Will 3-D printing ever have a place in the home?
The most controversial statement I've made about 3-D printing seems to be that it's not destined for widespread home use. My theory, from "5 Ideas That Will Change the World by 2025," is this:
Home-based 3-D printers are probably a dead end, but 3-D printing "manufacturing centers" stocked with top-of-the-line machines could readily support the demands of many people. Give these companies another 13 years, and it seems reasonable to assume much greater design fidelity (things will look sharper) and material variety (things will be made of more than just plastic) from quality machines. With an automated network, you might order a customized thing from a vast library, which would be assembled in the nearest 3-D warehouse and shipped to you by an unmanned delivery truck or helicopter.
3D Systems is certainly trying to place itself into homes, but its Cube can do only a fraction of the things a full-scale 3-D printer can, and it can only do them a fraction as well. Industrial machines should maintain an edge over home devices, and if that's the case, won't consumers be more interested in the higher-quality and more-diverse creations available from those industrial machines?
Sales, services, and materials for one frequently running million-dollar machine should far outstrip the revenue generated by one, 10, or even 100 in-home consumer 3-D printers. That's my opinion, at least. If you disagree, feel free to sound off in the comments below.
For more great information on 3-D printing, take a look at the Fool's popular free report: "3 Stocks to Own for the New Industrial Revolution." You'll get a wealth of resources on 3D Systems, Stratasys, and one lesser-known 3-D printing innovator that's making waves of its own. Click here for your free report now.