3D Systems Corp. (DDD, Financial), one of the manufacturers of 3-D printers, plunged on Friday. The stock was down 9% on news that HP Inc. (HPQ, Financial) is entering the metal printing business in 2018. Fellow 3-D printing company Stratasys Ltd.Ă‚ (SSYS, Financial) was also down around 6% on the same day.
Since hitting all-time highs during the 3-D printing hype in 2013, 3-D printing companies have been in a downward spiral. Both Stratasys and 3D Systems failed to materialize on the touted growth prospects of the industry.
What precipitated the recent decline?
The recent downturn was ignited by the competition fears from Hewlett-Packard. Hewlett-Packard launched its first 3-D printers back in 2016. The printers utilized polymer materials for 3-D printing.
The company also partnered with a myriad of companies, including Nike (NKE, Financial), BMW (BUD:BMW, Financial), Johnson & Johnson (JNJ, Financial), Jabil (JBL, Financial), Siemens (XTER:SIE, Financial), Materialise NV (MTLS, Financial), Shapeways, Autodesk Inc. (ADSK) and Proto Labs Inc. (PRLB), to support the ecosystem. It is also worth mentioning that Hewlett-Packard has about 65 channel partners around the globe. In Europe alone, the company has 35 resellers and partners.
Hewlett-Packard is now planning to move into metal printing, which is among the fastest-growing 3-D printing businesses.
The problem for 3D Systems and Stratasys is that HP supports an open material platform. With the support of partners’ network, HP may develop common standards that are widely accepted in the industry. This will make open platform attractive to service providers amid convenience and cost effectiveness. Proprietary solutions from the likes of 3D Systems and Stratasys might find it difficult in adoption. All in all, Hewlett-Packard’s move into metal printing doesn’t bode well for 3D Systems or Stratasys.
Is the decline an opportunity to get in?
Although the industry is set to witness double-digit growth in coming years, it’s quite difficult to make an investment case for 3D Systems or Stratasys. Increasing competition, lack of earnings growth and respective high valuation and expired patents are among some of the key problems for both the companies. Let’s explore in detail.
- Industry outlook remains positive.
Looking forward, the 3-D printing market is expected to grow at a CAGR of 25.7% from 2017 to 2023, according to a marketsandmarkets  report. The highest growth is expected in the aerospace and defense segment over the forecast period.
Gartner predicts the 3-D printers’ unit sales will reach 6.7 million by 2020, a 15x increase over current sales. Wohlers' 2016 report noted the additive manufacturing market will grow to $21 billion, an increase of around 32% p.a., from 2017 to 2020.
International Data Corp. is also bullish on 3-D printing spending and expects the spending to grow at a CAGR of 22% from 2015 to 2020.
The market is set to witness growth as there seems to be consensus among research analysts. But this growth doesn’t imply growth of the largest market shareholders Stratasys and 3D Systems for a number of reasons.
- 3D Systems and Stratasys failed to witness growth comparable to the industry growth in the recent past.
The industry was set to witness high double-digit growth. Canalys predicted the market would grow at a CAGR of 45.7% from 2013 to reach $16.2 billion in 2018. Wohlers predicted the market would reach $12.8 billion by 2018, a CAGR of 33% from 2013 to 2018.
But 3D Systems managed to post a CAGR of a mere 7.2% from 2013 to 2016. Stratasys reported a CAGR of 11%, relatively better revenue growth. But Stratasys’ growth was also nowhere near industry forecasts.
This wasn’t an industrywide phenomenon as printing services business Proto Labs grew its revenue 22% p.a. since 2013. It seems like 3-D printing services business performed well as compared to companies involved in supply of 3-D printers. Ernst & Young noted,
“Revenues are rising for service providers, whose main business consists of delivering ready-to-use prototypes and products as well as engineering and 3DP consulting services.”
Wohlers pointed out in the 2017 report that the industry grew by only 17.4% during 2017. But this was largely due to the slowing growth of two of the largest providers. Excluding them, the industry witnessed growth of around 25%.
In short, the industry outperformed 3D Systems and Stratasys in terms of revenue growth. This begs the question: Why?
Well, increasing competition is taking a toll on the leaders’ revenue. Both 3D Systems and Stratasys failed to achieve average industry growth during the past year as number of players grew at a faster rate than revenue growth.
Due to the growing market, the competition is also growing. The number of 3-D printer manufacturers increased from 49 companies in 2014 to 97 companies in 2017, a CAGR of 25%.
Source: Wohlers’ Report, 2017
Ernst & Young, in its 3DP report, also observed something similar.
“The latest developments show that, although the industry is still growing, the revenues and margins of systems manufacturers are declining.”
Ernst & Young further noted that:
“Stratasys and 3D Systems, are expected to grow at a lower level; younger entrants, on the other hand, are likely to continue growing at their historical rate as they will gain customers by introducing new technologies.”
This indicates that the competition base is increasing, hurting the leading market shareholders.
- Patent expiry is among the reasons for decline in revenue and margin.
All the key patents have expired, reducing the barriers to entry. With key patents expired, it’s not possible for both these companies to sustain competitive advantage. This will put pressue on the revenue base of leading companies like 3D Systems and Stratasys along with taking a toll on the manufacturers’ revenue as they try to maintain their market share. Ernst & Young noted the following in its 3DP report:
“Increasing market saturation may have forced systems manufacturers to reduce prices while overheads remained at the same level.”
- Despite a consistent downward trend in the stock price, the valuation doesn’t appear favorable.
3D Systems is trading at a forward price-earnings (P/E) of around 26 while Stratasys trades around 40. Stratasys looks more expensive, but analysts also expect Stratasys to grow its earnings at 36% p.a. during the next five years. 3D Systems, on the other hand, is expected to grow earning at CAGR of 10% during the next five years. This makes Stratasys a cheaply priced stock as compared to 3D Systems on a growth basis. Service providers like Materialse are cheaper than both the large manufacturers on PEG basis.
GuruFocus’ warning sign screen confirms that 3D Systems and Stratasys have been witnessing declining gross margins, and asset growth has been higher than revenue growth. This conforms to the analysis above that saturation in the industry is hurting the revenue growth of both these companies.
Final thoughts
The industry is set to grow going forward, but this doesn’t mean that market share leaders will benefit from this growth. The number of players has been increasing in the additive manufacturing space; big companies like Hewlett-Packard and General Electric Co. (GE) are getting into metal printing. Moreover, 3-D printing service providers are witnessing growth.
The metal printing ambitions of these companies will create problems for 3D Systems and Stratasys. Saturation in the industry will continue to hurt their prospects. Industry analysts are also convinced that new players will put pressure on the top line and bottom line of the additive manufacturing leaders.
Due to increasing competitive pressure, declining revenue and margin and high valuation, investors should stay away from 3D Systems and Stratasys. It’s better to invest in the industry ETF than investing in 3D Systems or Stratasys alone. The 3D Printing ETF (PRNT) is one of the choices to get 3-D printing growth exposure.
Services or metal printing pure-plays can also perform better given the growth prospects of printing service, especially metal printing.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
