The declining cost of 3-D printers has led to enthusiastic and widespread adoption among the medical, aerospace, automotive parts, jewelry, and even apparel industries, to name just a few. The two largest players manufacturing made-to-order objects are 3D Systems (DDD 4.76%) and Stratasys (SSYS 11.35%).
The recent surge of enthusiasm for accretive printing from the fast-rising proactive consumer, or "prosumer," market segment has resulted in impressive gains for both companies. Stratasys increased shareholder value by 131.6% last year, while 3D Systems has seen its market cap grow by a staggering 700% over the past three years.
While 3-D printing is one of the most exciting disruptive technologies to arrive on the scene in the past decade, it's important for investors to separate the fate of Stratasys or 3D Systems as individual companies from the 3-D industry itself. For starters, the companies are taking two very different approaches to top-line growth.
The market has a very low barrier to entry. Made-to-order mail-order communities such as Shapeways have thrived, locking in an impressive 66.6% increase in consumer orders from December 2011 to January 2012. Crowdsourcing websites such as Kickstarter have also accelerated the commercial development of 3-D start-ups. Even Staples now offers its customers 3-D printing services on Mcor's IRIS 3-D printer.
So even if 3-D printing is the future, it remains to be seen if Stratasys or 3D Systems will be the companies to shape that future. A single technological breakthrough may translate into an enduring competitive advantage and market dominance.
Stratasys
Stratasys engages in the manufacture, development, marketing and servicing of rapid prototypin devices, including 3-D printers. Stratasys' emphasis in the 3-D market is primarily on its industrial customers. On April 16, 2012, Stratasys announced that it intended to merge with Objet, a leading manufacturer of 3-D printers based in Rehovot, Israel, in a merger that has made Stratasys the single-largest player in the 3-D industry. Below is a table summarizing both the operating and tax synergies resulting from the merger.
| Company | 2011 Revenue (Millions) | CAGR (2009-2011) | 2011 Net Income (Millions) | Ownership | Operating and Tax Synergies | Long-Term Operating Model (Stratasys + Objet) |
|---|---|---|---|---|---|---|
|
Stratasys |
$156 |
98% |
$22 |
55% |
$7 million-$8 million of annual net cost synergies $3 million-$4 million of annual tax savings |
Revenue growth: 20%+ |
|
Operating margin: 20%-25% of sales | ||||||
|
Effective tax rate: 15%-20% | ||||||
|
Objet |
$121.1 |
34% |
$14.7 |
45% |
Net income margin: 16%-21% of sales |
Source: Stratasys IR.
Stratasys relies on its numerous value-added resellers, distributors, and a large commercial and industrial client base to drive profits. The company's range of 120 3-D printing materials is the widest in the industry and includes more than 100 proprietary inkjet-based photopolymer materials and 10 proprietary FDM-based thermoplastic materials. Stratasys' cheapest model is the $9,900 Mojo 3-D Printer, developed for the rapid industrial prototyping market.
3D Systems
On the other end of the spectrum is 3D Systems. The company's top-line growth relies on a mix of mid- to high-end corporate customers in the medical and aerospace industry, and a corresponding expansion of the consumer print-on-demand space. The Cubify 3-D printing system is aimed directly at the mainstream DIY market, with an introductory price of only $1,299. 3D Systems offsets this lower entry price by raising the price of its proprietary ABS cartridges. 3D's proprietary ABS CubeX cartridges are priced at $100 each, roughly twice the price of MakerBot's spools. The sale of these materials currently accounts for 40% of 3D Systems' revenue and is currently one of 3D Systems' fastest-growing segments.
Source: 3D Systems Investor Relations.
However, this vertical integration strategy is already beginning to experience some pushback from price-conscious DIY home hobbyists. The premium for 3D Systems' ABS cartridges essentially subsidizes MakerBot, while encouraging the use of pirated materials and hardware hacks. If the goal is to expand consumer adoption, 3D Systems might be better served by upping its price on its printers and lowering the price on its feedstock.
3D Systems also has drawn analysts' fire for pursuing a growth-through-acquisition strategy. In the opinion of this Fool, top-line growth through mergers and acquisitions is what you'd expect from a market leader struggling to erect a moat in a new industry. Microsoft made 30 acquisitions between 1994 and 1998. Since 1998, eBay had acquired 38 different companies in 1999 alone.
If real estate is about location, location, location, then technology is about patents, patents, patents. Cheap competition means cheap patents, many of which will form the basis for later derivative technologies and, hence, lucrative royalty payments down the line. The company is already making its application programming interface, or API, available to developers to create a consumer app ecosystem grounded in its technology.
Conclusion
The question of which 3-D printing company is right for you depends on how much risk that you, as an investor, are comfortable with. Sticking strictly to the commercial and industrial engineering and design market makes Stratasys the more conservative play. Should the prices of 3-D printers continue to fall, 3D Systems is ideally placed to exploit the DIY consumer market. As always, investors are advised to do their own due diligence before making a decision.
