In traditional manufacturing, parts are cut, bent, drilled, and then fastened together. In additive manufacturing, objects are printed to specification, without a single droplet of waste. Entry level printers now exist in the $1,200 range. Just ten years ago, it was impossible to find any for less than $100,000.
Today, companies as diverse as Nike, 3M, Ford, GE, GM, Mattel, and Oakley all use some sort of 3D printing system for prototyping demonstration products. In Europe, manufacturers including BMW, Nokia, Rolls Royce, and Airbus are doing the same.
There are a few different ways of investing in the additive manufacturing boom -- 3D printers, design software, scanners, and bio-printers.
3D Printer Manufacturers
Presently, there are two dominant manufacturers of 3D printing equipment – 3D Systems Corporation (ticker symbol: DDD) and Stratasys (SSYS).
3D Systems Corp. was the first to create the market in the 1980s and continues to grow rapidly. The company is aggressively completing acquisitions to consolidate its leadership in the industry. It groups businesses into three main market segments - personal, professional, and production lines of printing. The addition of Z-Corp last year added new laser scanning capabilities to their lineup, while the purchase of Vidar added scanners for medical and dental applications. Meanwhile, acquisitions of Alibre and Sycode also provide process integration and exposure to professional-grade design software.
3D Systems Corp. users a “razor and blades” business model, selling its printers for relatively small profit margins while making its money on proprietary printing materials, ranging from simple plastics to metal powders. Printing in three dimensions means that much, much more ink is consumed. During the first quarter of this year, DDD’s revenues grew by 63%, while earnings per share grew 47%.
What makes Stratasys interesting is its marketing and distribution agreements through Hewlett Packard.
For the first quarter, Stratasys reported 30% revenue growth and EPS growth of 38% over the same period last year. More recently, the company merged with Israel-based Objet to solidify its position as the number two manufacturer of 3D printers. Objet’s Connex printer can produce prototype objects using up to 14 different materials at a time, integrating components with varying levels of toughness, flexibility, temperature resistance, flexibility, color, and transparency.
Additive manufacturing offers many advantages over traditional methods. There is less waste material, small batch production is faster, inventory costs are reduced, and the level of detail for the finished product can be considerably higher. But, so far as mass-manufacturing is concerned, 3D printing is simply not as quick or cost-effective as injection molding.
CAD (Computer-aided design) systems create the digital templates used as manufacturing instructions by 3D printers. Unlike old-fashioned drawing programs, the current generation of CAD software can also optimize products for strength, weight, and material usage. There are number of different companies in this space, including Dassault Systemes SA (DASTY), Parametric Technology (PMTC), and Autodesk (ADSK). Dassault owns the high-end segment of this market for automotive and aerospace, while Autodesk is still somewhat better known for its architectural design software.
Looking at software applications for the consumer market, Google recently sold its Sketchup tool to Trimble Navigation (TRMB) for an undisclosed amount. Sketchup was one of the most popular free 3D design tools and has over 30 million activated accounts.
3D scanners are a complementary technology to additive manufacturing. Just think about the possibilities – combine a scanner with a printer and the result is something that could photocopy entire objects. Add in a wireless internet connection and 3D fax machines could be the next evolutionary step.
While Microsoft’s Kinect is used as a cheap 3D scanner by hobbyists, professionals are moving towards laser scanners developed by Faro Technology (FARO) and Z-Corp. Meanwhile, Align Technologies (ALGN) is grabbing market share in dental applications. Gummy trays for teeth impressions are quickly being replaced by faster, cleaner, scanning wands. Other players in this market include 3M (MMM) and GE (GE).
Now, imagine if you could print entire organs (teeth, livers, hearts, lungs) grown from samples of your own body tissue. Organovo (ONVO) has developed a bio-printer that uses human cells instead of ink to create living 3-dimensional structures. It is no surprise that Organovo was listed as one of the fifty most innovative companies in 2012 by the MIT Technology Review.
In all likelihood, product development will happen in three stages. The first stage will be human-like body tissues for drug toxicity testing. The second will be simple tissues for implant (cardiac patches, skin, or arteries). The final goal of manufacturing fully functional organs is years away, but the potential impact for the health care industry is simply mind-blowing.
The problem with Organovo’s business is that it is bleeding cash. This usually leads to shareholder dilution, so investors need to think of this as a very high-risk, very long-term proposition.
3D printing has all the qualities of a transformative technology. It has the potential to change just about every industry -- from manufacturing to retail and health care. The two main players (3D Systems Corp. and Stratsys) have a combined market capitalization of less than $3 billion. Both companies would make excellent acquisition candidates for bigger fish such as 3M or GE. It does not appear that the market has a fully priced in the size of the opportunity and neither of the major players in the 3D printing industry are household names (yet).
Quite simply, 3D Systems Corp. seems to offer the purest, broadest exposure to the industry. Given the recent run-up in share price, it may make sense here to wait and “buy the dips”. Based on relative valuation, it is appears to be somewhat more attractive than Stratasys. Recent weakness in the price of Faro stock also makes it a potentially interesting choice.
Disclosure: The author owns shares of DDD, SSYS, FARO and ONVO as of July 12, 2012.
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