I'm sure you've noticed that both 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS) tanked last night. The reason, apparently, was this Motley Fool article, according to two separate posts that attempted to make sense out of the steep drop. Does that make sense to you? No? Well, welcome to bubble investing.
For all the hype surrounding this technology, the fact is that no one knows how pervasive it will be, or how soon. Just as importantly, no one knows who will be on top if or when 3-D printing matures. Investors swarm into 3D Systems and Stratasys because they're the only real options in a tiny little pond of public companies. Other companies provide the software, or aren't public yet, or are so small as to be glorified penny stocks. As the technology matures, these companies might be left behind.
This is a familiar occurrence for those who have studied the history of technology, particularly computing technology. We so often compare 3-D printing to the original computing revolution that this brief overview of the industry from our free report, "The Next Trillion Dollar Revolution," seems particularly apt:
[In the 1960s], systems called mainframes ruled the computing world. Mainframes were massive computers that would fill an entire room and specialized in very specific tasks. For the period, they were stunningly powerful and capable machines, but they were also prohibitively expensive. At the peak of their popularity in 1973, only 14,000 mainframes were sold.
Why does that sound familiar? According to Wohlers Associates, 6,494 high-quality professional 3-D printers sold in 2011, up from 6,164 printers the year before. These are the machines that can retail for six figures, take up a lot of space, and are typically used only by industrial concerns that can both afford the high price and provide the technical expertise necessary to make full use of them. Consumers have virtually no use for these costly machines, and they tend to sell slowly. But that hasn't stopped the market from flooding into these two companies, echoing what happened with mainframe makers:
Still, despite the limitations of mainframes, investors bid up shares of companies leading the field. IBM (NYSE:IBM), the top seller of mainframes, commanded a market value of $42 billion in 1969; an astounding value for the time. Despite investor enthusiasm, the decline of mainframes would come in the 1970s. On the horizon sat an even more powerful technology: minicomputers.
Right now, we're entering the minicomputer era of 3-D printing, a seismic shift from big and bulky to small and (relatively) accessible. Personal 3-D printers are exciting -- and more importantly, a lot cheaper than the big machines. They can do a lot of what older model 3-D printing "mainframes" can do, just with a smaller print area and with a dramatically lower unit cost. That lower cost has led to a far more rapid rate of adoption -- in 2011, Wohlers reported that 23,265 personal 3-D printers were sold, representing a 289% growth rate from the year before. But they're not the PC of the 3-D printing industry, because they're not yet useful to the average person. What they are, however, is a big threat to the mainframe makers of 3-D: Stratasys and 3D Systems.
Consider this article by my new Foolish colleague Asit Sharma. It's one of the clearest examples of the users of mainframe 3-D printers switching to minicomputer printers that you can find. Ford (NYSE:F) is one of the most obvious targets for mainframe 3-D printers. Industrial design and parts engineering are time-consuming, precise processes that makes extensive use of 3-D modeling, and few companies are more dependent on the timeliness and accuracy of their designs than automakers. Previously, Ford would have used one or more of those 6,494 professional 3-D printers, but instead it's now switched to MakerBot's latest Replicators. If Ford has 100 engineers, and each of them gets his own Replicator (at a cost of $2,200), the total cost would still be competitive with one of the better professional printers currently on the market. Whatever the final cost is, you can be sure that Ford's number-crunchers determined that equipping all of its engineers with their own Replicators was a better value than buying 3D Systems' or Stratasys' high-end machines. How long will it be before other key customers arrive at the same conclusion?
One of the key takeaways in the report I quoted earlier is that virtually all of the mainframe manufacturers exited the industry as minicomputers took over -- all except IBM. I don't think that any investor would be ready to claim that either 3D Systems or Stratasys possess either the business scale or the business depth that IBM has exhibited throughout its history, and which it possessed even in 1973. That relative lack of scale puts today's leaders at far greater risk. The entire 3-D printing industry today generates about a tenth of the revenue -- and a tiny fraction of the net income -- as IBM did on its own way back in 1973, at the peak of the mainframe era.
These two companies could adjust and become low-cost leaders. 3D Systems is certainly trying to do so, and has just released the CubeX, which takes direct aim at MakerBot's Replicators. However, it's important to remember that there are not a lot of instances where even a package of personal 3-D printers will generate the same sale price or profit in the aggregate as one massive professional machine. If most customers decide to switch, it'll be for cost considerations. Until the true PC era of 3-D printers arrives, where the average Joe will have one on his desk to make... well, something... the industry will be stuck in its own minicomputer era. The ultimate winners of this seismic shift may not be the ones you've been watching all this time.