With the 3-D printing industry expected to grow by nearly 20% a year through 2021, 3-D printing companies are increasing their investments in order to capitalize on this opportunity. Consequently, 3D Systems (DDD 9.86%) and Stratasys (SSYS 2.78%) have lowered their earnings guidance expectations for 2014 as they ramp up efforts meant to grow their businesses longer term.
While this certainly will put a damper on their profit margins in the short term, it could lead to a situation down the road that allows those margins to expand. On a high level, 3-D printing companies are glorified razor and blade businesses, in which the 3-D printers act as the razors and the materials act as the more profitable blades. As unit sales increase, the demand for more profitable materials will continue to rise, and higher profitability can ultimately be achieved.
Last quarter, 3D Systems' material sales commanded a 73.8% gross profit margin, but only accounted for about 25% of the company's total revenue, while its printer sales segment commanded a 45% gross profit margin and made up 44% of the company's total revenue. Over the long term, investors should expect material sales to begin representing a larger portion of the company's revenue, and therefore, profit.
In the following video segment, 3-D printing analyst Steve Heller sits down with the head of Motley Fool's industrials sector, Blake Bos, to discuss why the real test of 3-D printing profitability will be determined over the long term. (The relevant segment can be found between 15:24 and 17:01.)