It's always interesting to see how much markets react whenever earnings reports or outlooks are issued by firms. Take for instance, the pessimistic outlooks issued by Stratasys (NASDAQ: SSYS ) and ExOne (NASDAQ: XONE ) . In more detail, Stratasys predicted that profit would only grow 22%, a figure that disappointed investors. On the other hand, ExOne decreased its 2013 revenue expectation to between $40 million and $42 million, below its initial estimate of $48 million. This news was not taken lightly by the market, with Stratasys falling by 8% and ExOne falling sharply as well.
What's interesting is that minor events and corrections such as these shouldn't have a large impact on a long-term investing thesis, especially in an industry with plenty of untapped growth potential like 3-D printing. In my view, investors in 3-D printing should first be looking at strategic decisions and acquisitions made by these companies. Second, they could also examine moves by relevant manufacturing and software companies that could either provide increased demand for 3-D printing or complementary technologies that expand what is possible through 3-D printing. In an industry like this, short-term fluctuations in earnings should have very little influence on the value of these companies.
So what does the long-term look like? One important consideration is that 3-D printer manufacturing has high barriers to entry, which means that it is becoming increasingly difficult for new entrants to come in and dominate established companies. That means that the rapidly growing demand for 3-D printers by manufacturing, medical, and other companies will be shared between a few dominant players that likely already exist. Furthermore, demand for 3-D printing is already forecasted to grow by 21% per year, eventually reaching $5 billion in 2017. And even if that figure conveniently does come from the Association of 3D Printing, the bottom line is that the industry is poised for significant future growth.
Hence, in such a promising industry, the only risk to investors is investing in fundamentally uncompetitive companies that will eventually lose out to existing competitors. Basically, what we want to avoid is betting on the duds of 3-D printing. With this in mind let's look at some of the major players.
The major players
Stratasys and 3D Systems (NYSE: DDD ) are the two largest players in 3-D printer manufacturing. Indeed, both have made a number of significant acquisitions to become the leaders in this industry. Most notably, Stratasys in September 2013 bought out MakerBot for $403 million. What MakerBot does is manufacture more affordable 3-D printers, whose price point is more suitable for hobbyists. Thus, this acquisition gives Stratasys, a company traditionally focused on professional-grade 3-D printers for industrial customers, a very strong foothold in the consumer market.
On the other hand, 3D Systems just completed its acquisition of Gentle Giant Studios, a leader in providing 3-D modelling for the entertainment and toy industries. Again, this should help the company reach a wider market and presents a positive outlook for future growth. Between 3D Systems and Stratasys, the former has been much more active on acquisitions. But although that may make it a larger player, not all of these have been entirely successful. For instance, a report by Citron Research notes that 3D Systems's Cube printers are significantly less well received by the public than MakerBot's. Furthermore, even though Stratasys's profit growth doesn't amaze investors, its revenue is forecast to grow at 40%, beating analyst expectations. This indicates that Stratasys is looking to invest a lot of money back into the company and its future. Indeed, at this point, Stratasys' growth prospects definitely seem more promising.
Looking at another major competitor in the 3-D printing industry, ExOne, while not as high profile as the previous two, also has better future prospects than its current stock performance suggests. The main reason that ExOne decreased its revenue forecast was the delays in some of their overseas deals. To me, this shows that ExOne is managing to capture market demand from abroad, and will have added sales in the next period. In fact, in October 2013, the company began its construction of a new $20 million facility in Germany (forecast to be completed in late 2014) that will contain space for production, service, warehousing, and R&D. Of the three companies discussed, I believe ExOne is the most interesting, with its one-year sales growth figure of 122.9% (compared to 113.4% for Stratasys and 42.9% for 3D Systems). Given that ExOne is much smaller than the other two, it will likely find it easier to achieve high growth rates and could be an interesting target for more risk-tolerant investors.
Foolish final thoughts
Thus, it seems like 3-D printing companies were unfairly punished by the market as of late. Given the amount of activity we see being undertaken by each company, and the growth potential for 3-D printing, they are all likely solid bets for the future. Their current drops in share price, cause by exaggerated market reactions, present a great opportunity to purchase shares at a discount to their true value. 3-D printing is still relatively new and more and more applications of this technology have yet to be discovered. Once these are found, the value of these companies is likely to rise, thereby justifying current market prices. 3-D printing is probably best thought of as a long-term hold so purchasing small amounts over a period of time could be a good purchasing strategy to minimize risk. Additionally, it may be of interest to invest in all three of these companies since the massive potential upsides mean that growth in one may be enough to offset possible losses in others. That being said, Stratasys looks to be the most promising among the three given its current size and its decision to acquire top performers such as MakerBot.
The end of the made-in-China era?
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