There are plenty of reasons for investors to get excited about the prospects of 3-D printing. This inherently disruptive technology has the potential to completely reshape the face of manufacturing in the decades to come. However, it appears investors have gotten a bit ahead of this reality by creating a disconnect between the actual growth trajectory of the 3-D printing industry and the even greater rise of 3-D printing companies over the last few years.
Given the recent cooling off in 3-D printing companies during the last month, investors could be reconciling the fact the 3-D revolution still has a long way until fruition. Not only will it take a significant amount of time for the additive manufacturing industry to mature, it's also going to take considerable technological advancements in 3-D printing technology, namely 3-D printing heads and materials. Since 3-D printing is technically a technology, it begs the question whether Moore's law will provide regular breakthroughs for the industry. In other words, can investors actually bank on Moore's law doing 3-D printing's heavy lifting?
Moore's second law
While most techies are familiar with Moore's first law, which states that the number of transistors on a chip will double every two years, fewer are familiar with Moore's second law. Moore's second law speaks to the fact that shrinking transistors come at the expense of increased costs associated with the process.
So what does this have to do with 3-D printing? Well, it stands to reason that technological advancements that happen in 3-D printing will likely come from increased R&D spending. And just how much did 3-D printing companies allocate to R&D last quarter?
|
Company |
Last Quarter R&D Spending |
YoY Change |
R&D Spending as a Pecentage of Revenue |
|---|---|---|---|
|
3D Systems (DDD +4.67%) |
$7,806 |
70% |
7.7% |
|
Stratasys (SSYS +1.85%) |
$9,222 |
25% |
9.6% |
Source: 3D Systems and Stratasys quarterly earnings press releases. Stratasys figures are pro forma to allow for comparability due to Objet merger. Dollar figure is in millions.
Since ExOne (XONE +0.00%) recently went public, it lacks the historical financial data to compare with 3D Systems and Stratasys on a quarterly basis. For the most recent nine-month period that ended September 2012, ExOne's R&D spending as a percentage of revenue stood at 7.4%. Considering that ExOne is an emerging growth company, you'd expect its R&D expenses to represent a far greater percentage of revenue. Perhaps that will change in the coming quarters since it recently raised somewhere in the neighborhood of $90 million.
For comparison, Intel spent about 34% of its revenue on R&D last quarter. Granted, shrinking transistors is most certainly a more costly and difficult task than improving 3-D printing technology, but a case could be easily made about how 3-D printing companies should allocate a larger percentage of their revenues to R&D. After all, aren't these companies supposedly in a high-growth phase, which usually suggests a heavy focus on R&D?
Hold your horses
Voted the most influential person in the 3-D printing industry today, Materialise CEO Wilfried Vancraen has his doubts about the game-changing possibilities of 3-D printing. He believes the process is often too slow and expensive to replace most mass market manufacturing. One caveat: He's only referring to the current state of 3-D printing technology. In Vancraen's eyes, 3-D printing technology essentially needs to improve by several orders of magnitude before it can even be considered a viable option for mass market manufacturing. Ultimately, he believes 3-D printing could represent up to 30% of the manufacturing industry. According to consulting giant McKinsey, the worldwide manufacturing industry contributed 16% to world GDP in 2010. During that time, the world produced $63.2 trillion of GDP output, suggesting that the 3-D printing economy has the potential to be worth over $3 trillion one day far away from now.
Some perspective, please
How does an industry grow from a several billion dollar industry today to a $3 trillion one when all is said and done? It's not going to be just one factor that would contribute to this perfect storm scenario of growth and it isn't going to happen over night or over several years for that matter. If I had to boil it down to factor, it would be that 3-D printing needs to expand its uses and applications in as many areas of the manufacturing process as possible. In other words, technological breakthroughs need to be achieved in order for this dream to become a reality. It all hinges on R&D spending.
As an investment thesis, 3-D printing is certainly not for the shortsighted. It's going to take a boatload of patience and an even higher tolerance for risk. For the chosen few, investing in the right companies today could be the equivalent of investing in right semiconductor stocks of the 1980s. From this perspective, it's completely irrelevant what "outrageous" P/E ratio (or lack thereof) 3-D printing companies are going for today.
