10 Reasons to Be Wary of 3-D Printing Stocks (Part 1)
3-D printing is all the rage these days – and investors are falling all over themselves to get a piece of the action.
3-D-crazed investors weren’t just focused on the stock market, either. They threw gobs of money at private 3-D printing companies via crowdfunding platforms, too.
Take FormLabs, for example. In just three hours, it surpassed its $100,000 fundraising goal on Kickstarter. And within two days, it had raised over $1 million.
Then there’s PrintrBot and B9Creator, which pulled in $830,000 and $513,000, respectively.
So, what’s next?
Well, such extraordinary stock rallies and fundraising efforts have sent countless analysts into a frenzy. They expect even bigger profits ahead, and are spitting out increasingly bold predictions.
“3-D printing is the next $1-trillion industry,” they say.
“We’re on the cusp of the next industrial revolution,” they proclaim.
“It will be bigger than the web,” says Chris Anderson, former Editor-in-Chief of Wired magazine.
3-D printing is literally going to “change the world,” MakerBot CEO, Bre Pettis, told our analysts at the Consumer Electronics Show.
Whew! Let’s calm down a bit and get some perspective here…
Too Bad We Can’t Print Some Realism!
Now, I’ll be the first to concede that 3-D printing, which involves converting digital files into actual three-dimensional objects, is a truly disruptive technology.
And it could change the face of manufacturing. Eventually.
But let’s be clear… no industry vaults from zero to $1 trillion overnight like some analysts want us to believe.
In fact, it’s taken 3-D printing almost 30 years just to get to this point. 3D Systems filed the first patent in the space (U.S. Patent #4,575,330) in 1986.
Here’s the truth: The 3-D printing industry is a long way from being the next $1-trillion industry.
So whatever you do, don’t believe all the hype. Or worse, don’t buy into all the hype surrounding 3-D printing stocks.
Now, please understand that urging such caution represents a switch for me. Not long ago, I was one of the only analysts who were bullish on the technology.
I wasn’t just mildly bullish, either. Here’s how I originally pitched 3-D printing to my paid subscribers: “A potent tandem of game-changing technology and off-the-charts growth makes this one of the strongest ‘Buys’ we’ve ever seen.”
As you can see, I couldn’t contain my enthusiasm!
But that was way back in October 2010. Markets and opportunities change over time. And the 3-D printing space is no exception.
With that in mind, I’m now urging caution, instead of unbridled bullishness…
Investing in 3-D Printing? Beware…
From hype, to growth, to valuation, here’s why we need to exercise restraint when investing in 3-D printing…
1. Don’t Buy into the Hype
Remember the dot-com mania? We learned then that there comes a point at which the hype gets out of hand. And we’re there with 3-D printing. Take a look at this chart from Google Trends.
As you can see, total web searches and news headlines for 3-D printing went nuts in June 2012. Public interest now rests at fever pitch levels.
What’s that saying from Humphrey Neill? Oh, yeah. “When everybody thinks alike, everybody is likely wrong.”
The contrarian in you should immediately be on high alert, given such universal interest and enthusiasm for 3-D printing.
2. Patents Precede Profits
It’s time to settle the investing equivalent of the chicken versus the egg argument. Does hype come before profits? Or do profits come before hype?
Survey says? Neither!
Patents actually come before both. After all, you can’t sell a product, especially one as specialized as a 3-D printer, without a patent, can you? Not if you plan to maintain any semblance of a competitive advantage.
In terms of timing our disruptive technology investments, that means we want to buy right after a spike in patent filings, not after a spike in hype.
Apply that rationale to 3-D printing, and you can see that patent filings spiked between 2005 and 2008.
And guess what? If you bought the most prolific patent filer, 3D Systems, right afterwards, you’d be sitting on profits of 747% right now.
Simply put, patents are a precursor to sales. Whereas a spike in public interest or hype doesn’t directly translate into anything.
In other words, the time to invest for the most profits is long before a technology starts making it onto the front pages of The Wall Street Journal. Follow the patents, not the headlines.
3. Remember, It’s Buy Low, Sell High
We might be able to justify buying into the 3-D printing trend right now if we could do it cheaply. But the two market leaders trade at princely valuations.
3D Systems and Stratasys currently sport price-to-earnings (P/E) ratios of 84.9 and 92.4, respectively. That works out to about a 500% premium to the average stock in the S&P 500.
Yes… both companies are growing at healthier double-digit rates than the average stock. But not fast enough to justify that much of a premium.
Investors are bound to wake up to the valuation disconnect eventually. Just like they did with other famously over-hyped stocks like Netflix (NFLX), OpenTable (OPEN), Facebook (FB), Groupon (GRPN) and Zynga (ZNGA). Do I need to provide any more reminders of how badly things end up when investors overpay for growth?
4. Trumped-Up Growth (Part 1)
Speaking of growth, people need to stop throwing around the “t” word – as in “trillion” – when it comes to 3-D printing. One day? Maybe. But not anytime soon.
Case in point: Over the last 12 months, 3D Systems and Stratasys – the top marketshare leaders – only reported about $500 million in sales.
In terms of total market size, estimates vary. But they’re currently all in the $1-billion to $2-billion range, with annual growth expectations of about 20%. So by 2020, we’re talking about an industry worth $5 billion to $10 billion. That’s a long way from $1 trillion.
I can think of countless other tech trends that are already much bigger and/or growing much faster than 3-D printing. Like biometric authentication and mobile payments, to name just two.
They boast much better profit potential, too. Want proof? Check out our special report – The Seven Most Investable Technology Trends of 2013.
5. Trumped-Up Growth (Part 2)
To be fair, 3D Systems and Stratasys are growing faster than the average industry estimate. That’s to be expected for first-movers and market leaders.
But if we dig into the numbers, one thing becomes immediately apparent – mergers and acquisitions are fueling a healthy portion of their growth.
For example, Stratasys made a big splash by merging with Israel’s Objet before its IPO last year. The move instantly grew its sales by over $100 million.
As for 3D Systems, it’s spent hundreds of millions of dollars on over 30 acquisitions since 2008. Result? It’s rising faster via acquisitions than through organic growth.
Case in point: Over the first nine months of 2012, total revenue growth hit 57%. Yet organic growth only totaled 24%. So if we evaluated the investment merit of both companies on their organic growth rates alone, they’re even more overpriced.
That’s all for today. I’ll share the last five reasons to ignore the 3-D printing hype in my next column. I’ll also tip you off to a trend that’s perfectly positioned for maximum profits.
In the meantime, let us know what you think of our work here by emailing us at firstname.lastname@example.org. And don’t forget to sign up for our free webinar, which airs on Tuesday.
I’m going to reveal the identity of a company that I’m convinced could end up being the top-performing stock of 2013. So be sure to tune in. I promise not to take up more than 10 minutes of your time.
Ahead of the tape,