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3 Things to Watch With 3-D Printing Stocks

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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:

DDD Total Return Price Chart

DDD Total Return Price data by YCharts.

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.

DDD Revenue Growth Chart

DDD Revenue Growth data by YCharts.

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  ) .

GMCR Revenue Growth Chart

GMCR Revenue Growth data by YCharts.

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.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Netflix, Apple, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Netflix, 3D Systems, Apple, Green Mountain Coffee Roasters, and Stratasys. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix, a lurking gator position in Green Mountain Coffee Roasters, and a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2012, at 7:38 PM, EquityBull wrote:

    Goo article,

    I recently sold my SSYS solely based on valuation. I think these are expensive now and the risk is to the downside should things slow a bit OR if 3D Systems and Stratasys get into a little bit of a price war.

    Also as you point out what happens when the generic materials start hitting at a fraction of the cost? This will obliterate the business model or razor and blade these co's enjoy now.. I can see china knockoffs of devices and materials swarming as the market hits critical mass.

  • Report this Comment On September 12, 2012, at 6:11 PM, BillDevine92563 wrote:

    let us not forget that solidoodle is making a sub $500 3D printer

    This sort of takes the wind out of the sails of 3D Systems who had one of the lowest priced 3D printers.

    It is pretty obvious that Solidoodle is looking to capture the home market and at this price it is very resonable. I paid almost as much for a high quality color printer (to print 11" x 17"). I own Stratasys but have been thinking about selling it and taking my profit to the bank as it were.

  • Report this Comment On September 12, 2012, at 7:04 PM, tyfoidhana wrote:

    3D printing is easily as game changing as the telephone to believe it wont be as necessary in the home or even the car for that matter 30 years from now like the phone is today would be seriously short sighted in my opinion

  • Report this Comment On September 12, 2012, at 11:56 PM, XMFBiggles wrote:

    @ tyfoidhana -

    What, exactly, would you do with a 3D printer in your car? I don't want to be short-sighted, but at the point where you're talking about creating objects while you travel, you might as well admit that we've moved beyond an investing perspective into the realm of Star Trek.

    - Alex

  • Report this Comment On September 13, 2012, at 2:06 PM, 3drp wrote:

    While I agree on the general purpose, home use being a dead end, the home based designer can readily use some 3D printing products.

    I disagree with the general concept of "manufacturing centers". The concept of "rapid manufacturing" with these technologies is very limited. Material properties and speed are the 2 major issues. Material properties are limited and over hyped. ABS from 3D printers is nothing like an injection molded part. Speed is very dependent on geometry and it becomes a trade-off of speed vs quantity. Thise too, has been over hyped by the manufacturers.

  • Report this Comment On September 13, 2012, at 2:23 PM, XMFBiggles wrote:

    @ 3drp -

    You make valid points. But doesn't your argument imply that neither material properties nor print speed will see real improvements in the years ahead?

    How fast does a single printer need to be in order to justify 3D printing manufacturing centers, vs. where it is now, assuming that materials aren't an issue?

    - Alex

  • Report this Comment On September 13, 2012, at 10:16 PM, chrisflyz wrote:

    During a recent engineering session at Rice University we got to the 3d printer in their lab. This seemed to be a workhorse for the program. Even with not much else going on in the lab, the printer was in use. I was impressed with the fairly compact size. I, too, had also not given much credence to any future home use until I started thinking of my wife's programmable Cricut cutter for her crafts, etc. I realized that uses such as this and possibly cottage industry i.e. making simple stuff, personalizing it, and selling it might --MIGHT-- be part of the future for home use for "regular "people as long as certain price points are met. Still studying the issue as I missed SSYS around $40.

  • Report this Comment On September 14, 2012, at 10:07 AM, smacunalum wrote:

    The home use of the 3d printers is more than people just making trinkets or whatever. It is more about people getting interested in the technology and learning and experimenting. This is similar to the early home computers that the "nerds" used to play with, like the little Texas Instruments computer or even the Commodor 64. The growth rate in users will fuel a growth rate in development both in engineering and application.

  • Report this Comment On September 27, 2012, at 12:12 PM, RedEyeTim wrote:

    Alex, your number 3 item to watch is aleady happening. Not sure if you are aware of Stratasys' business unit RedEye.

    RedEye is a digital manufacturing center that houses over 130 FDM Additive Manufacturing systems globally. Most of that capacity at our Eden Prairie, MN facility.

    Check out a recent story that talks about just this topic:

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