Hot stocks for a reason
3D Systems Corporation (NYSE:DDD) and Stratasys, Ltd. (NASDAQ:SSYS) are in the business of manufacturing and selling 3D printers and related products like materials and services. They have been growing at an amazing speed over the last years, and both companies are already profitable.
Their prices have delivered mind blowing returns over the last years as 3D printing becomes an increasingly popular technology proving its potential in several areas. The stocks have become quite expensive as investors realize the disruptive potential of this technology, but make no mistake; we are barely in the first stages of a long term trend which should provide enormous opportunities in the next years.
Innovation is the driving force of capitalism, and when investors position themselves in the early stages of a new and revolutionary technology, the possibilities for gains can be remarkable. That´s why 3D printing is such an interesting sector: although the technology is already being applied in many different areas, it still has many years of amazing potential for growth ahead of it.
You say you want a revolution
3D printing creates a new paradigm when it comes to the design, manufacturing and distribution of many products. While traditional manufacturing is based on the removal of material by methods such as cutting or drilling – subtractive processes -, 3D printing uses an additive process where successive layers of material are laid down in different shapes to create almost any kind of object.
3D printing can be applied to a wide variety of materials, and it´s currently used in industries like engineering, architecture, dental and medical care, aerospace, automotive, jewelry and footwear among many others. The technology has gained a lot of popularity over the last years, and there are strong reasons to expect substantial growth in the future.
Additive manufacturing makes it possible to create all kinds of objects of virtually any shape from a digital model, and it significantly reduces the waste of materials thanks to its more efficient additive process. This has important implications when it comes to manufacturing speed and efficiency, and it makes rapid prototyping much easier and more affordable.
Besides, as the technology becomes more popular and accessible, it has the potential to radically reduce transportation costs. Instead of having products shipped from another continent, consumers could simply go to their local printing center – or even use their own home 3D printer – and print their own copy of the product they want.
3D printing is having a revolutionary impact when it comes to product customization, creating a new design under the new parading is almost as cheap as manufacturing new copies of an existing one. This is having important implications in the dental care and orthopedics industries, for example, where medical devices especially customized for a specific person can be made in a much cheaper and more efficient way.
And the best part is that we are barely seeing the tip of the iceberg at this stage, as the technology becomes more economical, more popular and easier to use, its long term potential could be practically limitless. The term “technological revolution” is usually used too loosely in Wall Street, but when it comes to additive manufacturing, it’s quite a fair description about its long term potential.
Placing the right bet
Stratasys, Ltd. (NASDAQ:SSYS) is more focused on rapid prototyping; the company sells high-end printers, mostly to clients in the commercial and industrial sector. Stratasys used to be the second largest manufacturer of 3D printers behind 3D Systems Corporation (NYSE:DDD), but the company recently acquired Objet; a leading manufacturer of 3D printers based in Israel. After this merger, Stratasys, Ltd. (NASDAQ:SSYS) became the biggest player in the industry.
3D Systems Corporation (NYSE:DDD), on the other hand, is a bet on the democratization of 3D printers; the company is permanently working on reducing the cost of its products in an effort to make additive manufacturers more accessible for consumers. In addition to printers which represent a 36% of revenue, 3D Systems Corporation (NYSE:DDD) also makes a big proportion of its sales from print materials and services, which brought in a 29% and 35% of sales respectively during 2012.
Stratasys, Ltd. (NASDAQ:SSYS) is probably a safer bet due to its bigger size and its focus on industrial customers, where 3D printers have already proven their viability and convenience in different areas. When it comes to growth potential, however, 3D Systems looks more promising since it’s targeting a potentially much bigger market.
The company will start selling its Cube 3D printer in Staples for a price of $1299 in June, if that project goes well, the company could achieve an important milestone in the democratization of 3D printing by bringing the product closer to the masses. On the other hand, competition is also a bigger risk in the lower end of the pricing spectrum; less sophisticated printers are easier to build by existing players or new entrants, so 3D Systems could be more vulnerable to a changing competitive landscape.
Controlling the risks
If I had to choose one company in the sector I would go with 3D Systems Corporation (NYSE:DDD), the company has higher potential, and it also has a better track record when it comes to translating sales expansion into growing earnings over the last years. However, buying both companies makes a lot of sense in terms of risk reduction, Stratasys, Ltd. (NASDAQ:SSYS) is a safer bet, and diversification reduces the risks in case one of the companies leaves the other one behind in the competitive race for dominating 3D printing over the next years.
The sector is going through a consolidation process, with both 3D Systems Corporation (NYSE:DDD) and Stratasys, Ltd. (NASDAQ:SSYS) being active acquirers of other companies in the business. This is not only hazardous from an operational and financial point of view; it can also generate share dilution and produce some wild swings in stock prices in a relatively short period of time.
Besides, both companies are trading at stratospheric valuations because the market is expecting plenty of growth from these names. Investors in these companies need to be prepared for high volatility in case there is any slowdown in growth or any disappointment in terms of financial performance.
Considering the risks, it may be a good idea to start with a small position an increase over time if prices become more attractive and the companies continue on the road to reaching their long term potential. Keeping your head cool when making investment decisions can be crucial to keep the risks at bay, and it may also increase long term returns by capitalizing the opportunity to buy at discounted prices when volatility is on the rise.
Bottom line
3D printing is one of the most explosive growth opportunities the market can offer to investors over the coming years. The technology has many possibilities for disruption, and we have barely seen the tip of the iceberg when it comes to its long term potential. Investors beware though, it´s going to be an exciting ride, but it most likely won´t be a smooth one, so manage your positions accordingly.
The article Investing to Profit From the 3D Printing Revolution originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés Cardenal owns shares of 3D Systems. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
