3D Systems Corporation
The largest 3D printing company looks well-positioned to benefit from growth in the additive manufacturing industry, but investors should wait for prices to correct before taking a position
3D Systems Corporation (DDD) is the largest publicly-traded company in the global 3D printing industry. The company, which invented stereolithography and the .stl* file format over 25 years ago, is a pioneer in the additive manufacturing industry.
The company’s share price has rallied almost 50% in the last year with strong growth in the additive manufacturing industry, and we believe that the company will continue benefiting from the increasing popularity of 3D printing moving forward.
3D Systems operates in the United States, Europe, and the Asia-Pacific. It currently generates most of its revenues from the US (56%), with Europe being its second-largest market by revenues.
*The .stl is a computer file format in which objects are converted into so that their geometric specifications can be read by a 3D printer and replicated into a three-dimensional print.
The company’s revenues in the last year grew 43% over the earlier year, increased to $460.15 million during the last four quarters.
3D Systems provides 3D printers, 3D printing materials, on-demand custom parts and services, and 3D authoring solutions. The company has divided its operations into three segments, namely: Systems and Other Products, Materials, and Services.
Systems and Other Products
The Systems and Other Products segment is involved in the production of both professional and personal 3D printers. These include SLA, SLS, and SLM production printers, and MJM, 3DP, and SLA professional printers. The segment also produces 3D scanners, which are expected to be in strong demand moving forward.
As of 2012, sales of 3D printers and related products contributed more than a third of 3D Systems’s overall revenues. The segment posted the highest revenue growth rate among the company’s businesses in FY12, growing more than 90% YoY. Gross margins for the segment were almost 43% in FY12, having contracted 26.8 percentage points (ppts) YoY.
3D printing materials are somewhat similar to the print cartridges used in traditional printers. 3D printing supplies come in three different materials – sand, metals and plastics. 3D Systems provides engineered plastics, nylon, and metal materials and composites.
The Materials business has the potential to generate revenues for the company on a recurring basis, as its products are required throughout the life of 3D printers to keep them operational. The segment registered 46% growth in revenues in FY12, and contributed 29% of the company’s topline. Gross margins in the segment expanded 3.5 ppts to 68.2% in FY12.
The Services segment provides customer and after-sales service for the printers and software sold by 3D Systems worldwide. These services include warranty claims, maintenance, training services, on-demand parts services and other customer services.
The Services segment, just like the Materials segment, generates revenues recurrently. The segment reported revenue growth of almost 33% YoY in FY12, and contributed 35% of the company’s total revenues. The segment’s margins expanded 4.6 percentage points to 45.7% in the same year.
Demand from the industrials sector has been one of the strongest growth drivers for the 3D printing industry, with the aviation, automobile, and the healthcare industries rapidly adopting 3D printers for various applications.
Consumer product manufacturers, too, have become one of the biggest users of the additive manufacturing process, accounting for almost 22% of the total revenues generated by the 3D printing industry.
Among these companies, GE is considered to be the biggest user of 3D printers. In 2012, GE showed how serious it was about using 3D printing in its manufacturing process when it acquired Morris Technologies. GE now uses the 3D printing technologies it acquired to print 19 different fuel nozzles for its aircraft engines.
Similarly, United Technologies’s Pratt & Whitney LEAP engines, 4,500 units of which have already been ordered, incorporate more than 24 3D-printed parts.
Producers of medical devices and diagnostics have also boosted the demand for 3D printers, as they are increasingly using the technology to print customized parts in their devices.
Today, more than 90% of all hearing aid shells are produced through 3D printers, and around 10% of all dentures and dental implants sold are fabricated using 3D printers. Customized hip and knee replacement implants, braces, supports, and even organs can be printed through 3D printers.
According to Wohlers Associates, which “provides technical and strategic consulting on the new developments and trends in rapid product development and additive manufacturing”, the 3D printing industry earned $361 million, more than 16% of its total revenues, from the medical and dental industry in 2012. It is estimated that sales to the industry may have reached more than $500 million for the 3D industry by the end of 2013.
Demand from consumers holds the greatest potential for 3D printer suppliers. 3D printers were out of reach for most consumers till fairly recently due to their high selling prices; however, average selling prices have declined rapidly over the last few years. Consumers can now buy a 3D printer for as low as $300.
According to Credit Suisse estimates, the current market penetration of 3D printers in US households is only 0.06%, but is expected to increase to 0.12% by 2016 as average selling prices come down to $1,500. Bidness Etc believes that the actual market penetration will be far higher.
3D printer system sales are just one part of the overall growth equation of the 3D printing industry – the other is after-market sales and service. After-market sales and services include sales of materials – sand, plastics, and metals – direct parts and services. The after-market is expected to grow at a faster rate than systems sales: 3D printing system revenues increased by an average 15% YoY in 2012 for the industry, whereas revenues from materials, direct parts, and service and parts increased 29%, 51% and 23%, respectively.
Increasing Shipments and the US
Data provided by Wohlers Associates paints a positive picture for the 3D printing industry. Consumer 3D printer shipments, which totaled 35,508 in 2012, are expected to reach 70,000 in 2013, according to the consultancy.
The US has the largest number of 3D printer installations in the world, followed by Europe. Revenues for the four largest companies listed in the US totaled $608.86 million in 2012, and these companies had an average gross margin of 47.29%.
Currently, 3D Systems is trading at a forward one-year price-to-earnings multiple (P/E) of 69x, which is a 56% discount to the industry average. When compared to Stratasys (SSYS), the second-largest 3D printing company in the world, 3D Systems is trading at a premium of around 38% in terms of the forward one-year P/E multiple.
Similarly, 3D Systems is trading at a one-year forward EV-to-EBITDA multiple of 38.5x – a discount of 21% to the industry, but a premium of 30% to Stratasys.
The Hewlett-Packard Company (HPQ) is expected to enter the 3D printing market in 2014; with Chinese companies also expected to enter the fray, average selling prices will soon start declining – hurting the margins of established companies like 3D Systems. Once the impact of the entry of Chinese manufacturers is absorbed, 3D printing companies can be expected to reorient to rely on product differentiation to generate revenue growth. We may also see a situation develop along similar lines to what happened in the solar industry, where declining average selling prices led to a number of bankruptcies and consolidations in the industry.
Bidness Etc is therefore neutral on 3D Systems, and we feel that, on current valuations, Startasys is a better buy given its stronger growth potential and cheaper valuation compared to competitors. We will be following up on this piece with an analysis of the company.