Considering the 3D Printing Industry - DDD
Lately I have been looking into 3D printing as an investment opportunity. I may be a little late to the game considering TMF has been promoting 3D Systems (DDD) for quite some time now, and the stock has already accumulated roughly 400% in the past two years. However, the technology for 3D printing is still relatively very young, especially in the realm of consumer/retail 3D printing. This point is demonstrated by the fact that bigger players, such as Hewlett-Packard, are yet to enter the market or are planning on entering the 3D printing market in 2014.
The two primary players in 3D printing, that are at least publicly traded, seem to be 3D Systems and Stratasys (SSYS). I am leaning toward 3D Systems, because the business has at least been able to turn a profit and produce positive cash flow. Both businesses have a nice chunk of cash, primarily from the issuance of new stock within the past 18-24 months. Neither company, from what I have researched, is very flashy with its approach. Both seem to have "senior" management teams (in other words, most top management is over the age of 60 years old), which I must admit is not what I initially expected.
3D Systems has focused on buying out various businesses within the industry, and certainly has the cash on hand to continue this approach for the time being. The key, of course, is that the company begins to generate sufficient cash flow through its internal affairs. Trading at a P/E of over 130, 3D Systems does not have the appearance of a bargain. The company is currently valued at $6 billion and is trading at an all-time high; even so, I am tempted to open an initial position in the business.
Some are speculating that 3D Systems or Stratasys could be a buyout target, perhaps by H-P, at some point down the road. A buyout of either company would require a hefty amount of change for any business, even H-P (which has had some difficulties with profitability and cash flow production over the past several years). In other words, I would not invest in either DDD or SSYS with the expectation of a buyout. It's not impossible, but should not be the primary reason behind buying or holding a position in the stock.
High P/E ratios are not an automatic sign of overvaluation. I don't recall a time over the past several years when Chipotle had a P/E ratio of less than 50. So long as a company is able to justify high ratios with growth in income, cash flow, market share, etc. higher valuation ratios can be warranted. 3D Systems, I feel, might be in this category. 3D printing is a burgeoning industry on a worldwide scale in both manufacturer and consumer/retail markets.
Using the Future Value evaluation method, DDD can double over the next five years if earnings grow at an average rate of 50% for the next five years and the stock is trading at a P/E of 40 in five years. This isn't an entirely unlikely scenario, particularly with the company increasing cash flow production (and net income) over the past several years, but clearly there is a lot banking on exceptional future growth.
Future Value Evaluation: Current EPS * (Avg. Annual Growth Rate ^ # years) * Future Expected P/E
.45*(1.50^5)*40 = $136.69
I would love to find a low-key and non-sexy business involved in the supply of 3D-printed products (or items to manufacture 3D printing machines), similar to what Sun Hydraulics does by supplying parts for machines which require hydraulics. These businesses, which don't tend to have the most glamorous operations on paper, can be effective ways to gain exposure to growing markets while going under the radar. So far, however, I have not found any business quite like this in the 3D printing field.
One thing to consider is DDD reports earnings tomorrow. The question is whether the market will have a good reaction to earnings or not; apparently DDD has missed analyst estimates the past three quarters:
Three-dimensional printing is all the rage these days, and 3D Systems (NYSE: DDD) has been the promising genre's poster child. The ability to print physical objects isn't fast or cheap, but the same could be said about the original paper printers.
3D Systems reports on Tuesday. Once again, Wall Street's holding out for another period of robust growth. They see revenue soaring 46% for the quarter, with earnings per share climbing from $0.21 to $0.26. Despite 3D Systems' monster return over the past two years, the company has failed to beat analyst profit targets in each of the past three quarters.
The potential for the 3D printing industry is very exciting, and my feeling is that DDD could be a solid investment over the next 10+ years even though it is currently near an all-time high. I'm close to opening a position in DDD; the slight drop in price today doesn't hurt those chances either.