If you're interested in investing in 3-D printing companies, you'll want to know the right way to measure their merits. At The Motley Fool, we're big fans of using investment checklists to help us make smarter decisions about stocks. Here's a checklist covering five key areas that can help you find better stocks in the 3-D printing industry.
1. System sales
3-D printing is a "razor-and-blades" industry. Initial hardware system installations lead to multiple recurring revenue streams, including printing materials and service contracts. Companies with a larger installed base of systems will reap the lion's share of future rewards.
Stratasys (NASDAQ:SSYS) reported that it sold more than 11,000 3-D printers during the fourth quarter and now has over 75,000 installed worldwide. It has a nearly 47% share of the global installed base, which will be very difficult for potential competitors to displace.
As you're thinking about system sales, consider the following four questions:
- Is the company increasing its annual orders of hardware systems?
- What is the company's total installed base of systems, and is this larger than competitors'?
- If 3-D printing companies can sell their systems at high margins, it could indicate that they are differentiated from competitors. What is the gross margin that the company is getting on the sale of its systems?
- How long is the replacement cycle -- i.e., the average life of a system that will produce the recurring revenue stream?
2. Material sales
3-D printing materials are proprietary and often carry very high margins. If companies sell a lot of the materials that their machines use, it indicates that their customers are actually using and becoming familiar with their products, which makes it more difficult for those customers to switch to a rival's system in the future.
3D Systems (NYSE:DDD) reported $128 million of print material revenue during 2013, a 25% increase over last year. Its gross margin from materials is now a very healthy 74%, which is a significant boost from 65% just two years ago.
As you're thinking about material sales, consider the following four points:
- Is the company increasing its annual revenue from material sales, and is the company growing its material sales faster than its sales of new machines?
- Are the systems being used more often -- i.e., is the ratio of material revenue dividend by the installed base of machines increasing?
- What material type(s) does the company sell? Are these materials proprietary (which would lock out competitors)?
- What is the gross margin of the materials?
3. Marketing and adoption
The 3-D printing industry is still in its early stages, so developing customer relationships and new applications are imperative.
ExOne (NASDAQ:XONE), for instance, now operates six production service centers globally, which use their printers to produce working parts for prospective customers. The company reported that 100% of customers who purchased an ExOne machine previously used its service centers to take a test drive first.
Consider the following three points as you're thinking about marketing and adoption:
- Normally, spending heavily on sales and marketing could be a black mark for companies. However, since 3-D printing is growing so quickly, we would actually prefer to see companies spending to build a name for themselves. Is the company spending more than 25% of revenue to sell and market its products (SG&A expense)?
- Does the company offer service centers that can encourage one-time customers to become longer-term system owners?
- How is the company spending its money? Is it investing to grow its own operations (indicated by a relatively high research and development expense), or is it trying to buy up its rivals (indicated by numerous acquisitions)?
4. Competitive positioning
Not all 3-D printing companies look alike. The way companies position themselves compared to their competitors will be extremely important as applications continue to mature.
Niche player Arcam (NASDAQOTH:AMAVF) sells systems for high-end industrial customers to produce medical implants and aerospace parts. This customer segment is extremely demanding in its specifications, but can handle higher price points and can develop decade-long relationships.
This category is highly subjective, but consider these two points when analyzing competitive positioning:
- What technology does the company use? What are the benefits and limitations of this technology (build speed, bond strength, resolution)?
- Who are the company's primary customers -- consumer or industrial? Is its current market share only a small percentage of its total addressable market?
5. Financial strength
Fast-growing markets come at the price of uncertainty. We want to find 3-D printing companies that can withstand an economic downturn and fund growth organically.
Most 3-D printing companies have little or no debt. However, recently public voxeljet (NYSE:VJET) has long-term debt that is 30% of its total assets. This means that more of voxeljet's operating profit must go to paying interest on its debt rather than funding growth. Also, if business were to slow down, the debt would remain.
As you're thinking about financial strength, consider the following three points:
- Is the company's balance sheet financially strong -- i.e., is long-term debt less than 10% of total assets?
- Is the company generating positive cash flow from operations?
- If the company is making acquisitions, is it doing so in a way that is shareholder-friendly -- i.e., is it diluting shareholders by issuing new stock to buy rivals or is it funding those purchases with cash or debt instead?
3-D printing is an exciting industry that continues to grow quickly. There are several companies for investors to consider, as well as the expectation that several more will come public in the future. Keeping an eye on the metrics presented in this checklist can keep investors printing up solid returns.
Simon Erickson owns shares of 3D Systems, ExOne, Arcam, and Stratasys. The Motley Fool recommends and owns shares of 3D Systems, ExOne, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.