With a little help from a year-end Santa Claus rally, the four pure-play additive manufacturing -- better known as 3-D printing -- companies could wrap up 2013 with a 200% average return. 3D Systems (NYSE:DDD), Stratasys (NASDAQ:SSYS), ExOne (NASDAQ:XONE), and Arcam (NASDAQOTH:AMAVF) are currently up an average of 188% for the year. Let's look at which company is powering the group, which is holding it back, and the three key events that investors should monitor in 2014.
First, a housekeeping note: Voxeljet isn't included here, since it's only been a public company since mid-October. And Organovo -- which uses 3-D printing technology to "bioprint" human tissues from cells -- is excluded because it's a biotech play.
Santa needs to rally if he wants to catch up to Sweden's Jultomte
Jultomte, Sweden's equivalent of Santa Claus, has been gifting Sweden-based Arcam investors big-time all year. Arcam's 485% return clearly skews the sector average. Even if we exclude Arcam, however, the three other companies are averaging a fat 89% return. (Arcam had to be added in, since YCharts didn't include the company in its system until February.)
Arcam makes printers that use electron bean melting (EBM) technology and targets customers in the medical implant and aerospace industries. The company's stock trades on the Nasdaq OMX Sweden and can be bought over-the-counter in the United States. It's a thinly traded company, which means it can be highly volatile.
Why the outsized return? First, Arcam was considerably smaller than its peers, especially 3D Systems and Stratasys, when it started its huge run-up in 2013. It's still much smaller than the two leading companies, with a market cap of $631 million as compared to 3D Systems' $7.8 billion and Stratasys' $5.7 billion. The law of large numbers dictates that it's easier for smaller companies to post the same percentage increases in revenue and/or earnings than it is for larger companies. Second, Arcam was flying under the radar since it doesn't trade on a major U.S. exchange; investors then piled on when it was "discovered."
Heavyweight and first-mover 3D Systems and industrial-focused ExOne, which IPO'd in February, have also been having a phenomenon year. Each company has returned approximately 110% for the full year.
ExOne's roller-coaster ride can largely be explained by the sector's "hot" status. There were only two pure-play 3-D printing stocks trading on major US exchanges at the time of its IPO. Its entry into the publicly traded ranks was greeted with extreme exuberance as it provided another option for investing in the sector. While the company's focus on high-end industrial systems shows promise, there's no doubt that the company's stock price got ahead of the fundamentals, even though it occupies a hot sector. It's not surprising that it had a considerable pullback as a result.
The other sector leader and (co-) first-mover Stratasys is the laggard of the group, though its 46% return is wonderful on an absolute basis. While 3D Systems and Stratasys started the year off with about the same price-to-sales valuation, investors have recently assigned a premium value to 3D Systems' stock. It now sports a 16.8 P/S ratio, as compared to Stratasys' 14.2.
This isn't surprising, since 3D Systems is currently profitable on a GAAP basis and Stratasys is not. Stratasys had been profitable, but its late 2012 merger with Object affected its profitability. Analysts expect the company to return to profitability in 2014.
Other than the usual growth and financial metrics, there are a few things that investors should home in on in 2014.
1. Project Ara's progress The goal of Project Ara -- which teams 3D Systems with Google's Motorola unit -- is to create a large-scale 3-D printing manufacturing platform capable of producing customizable open-source modular smartphones. Naturally, this mission entails integrating the 3-D printing of various types of materials into the platform. This includes conductive and functional materials, which will require 3D Systems to expand its materials capabilities.
Foolish writer Steve Heller described this project as having the "potential to ultimately revolutionize the entire manufacturing sector." I agree, and think this is a must-follow project.
2. Stratasys' expansion into metals
Stratasys doesn't have systems that can print metals, though founder and chairman Scott Crump has been quoted as saying the company is interested in expanding into those materials. 3D Systems' purchase of Phenix Systems last summer provided it with metals capabilities, as Phenix makes direct metal laser sintering (DMLS) systems
While Stratasys sports many attractive features, it needs to branch into metals to stay competitive with 3D Systems over the long term, in my opinion.
3. GE's next 3-D printing moves
General Electric's (NYSE:GE) 3-D printing operation, which it acquired when it bought Morris Technologies in late 2012, consists of 35 printers. These are mainly comprised of privately held EOS's DMLS systems, along with some Arcam EBM systems.
GE plans to use 3-D printing to produce fuel nozzles for its new Leap jet engine. Each engine will contain 19 nozzles. The company needs to fabricate 85,000 nozzles for the engine orders it already has in hand, and according to a Bloomberg article, it expects its annual production to eventually require 45,000 nozzles.
The company's huge nozzle production goals would require it to purchase at least 60-70 expensive 3-D printers, which isn't cost-effective. GE plans to use current technology to ramp up its production, while also working with supply chain manufacturers to develop new higher-capacity technology. The company is now testing DMLS systems from both 3D Systems and privately held Concept Laser.
Investors should watch to see which 3-D printer manufacturer gets new and/or additional business from GE. Not only would GE's business be a big win, but it would likely also serve as a good prediction about which company's technology might be favored by other aerospace companies.
BA McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems, ExOne, and Stratasys and has the following options: short January 2014 $20 puts on 3D Systems. 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.