In my previous write up, I looked at how 3D Printing is set to revolutionize manufacturing, particularly in developed countries. Since my post, we have seen very wild price action in the stocks of the most popular 3D printing stocks. Over the last six months, ‘3D Printing’ (DDD) is up 244% YTD, ‘Desktop Metal’ (DM) is down 33%, ‘ExOne’ (XONE) is up 114% and ‘Stratasys’ (SSYS) is up 13%.
In this article, I want to tune out the noise and take a closer look at these 3D Printing companies. In doing so, I pick out the 3D printing stock which I think will benefit most from this secular growth trend.
Recap on 3D Printing
Firstly, a quick recap on why I am bullish this sector. For the full overview, see my previous article.
Additive Manufacturing (AM), also known as 3D Printing, refers to the process of building products layer by layer, using specialized printing machines. These machines are integrated with computer models which ultimately allow the user to turn digital images into physical objects.
This is in contrast to traditional manufacturing methods where objects are either formed by; (1) Subtraction, whereby you take a block of material and subtract the bits that you need, or
(2) Forming, where molds are injected with material to produce a specific object.
The Benefits of 3D Printing
There are a few key benefits associated with AM. These include:
Personalization – Unlike with traditional manufacturing, AM lets you create niche and specialized products at any scale. Even the smallest of changes to design can be programmed directly into the production process and this doesn’t require new parts. This is particularly advantageous in industries where parts need to be tailor made (e.g. medical devices)
Speedy Prototyping – In a similar vein, 3D printing allows new products to be created effortlessly without waiting on parts to be made prior to production. This makes it quicker to prototype and to test designs which is vital during the early stages of production
Complex engineering – 3D Printing can create more sophisticated designs than traditional manufacturing methods (which generally tend to be block shapes). Some of these designs include complex lattice structures (like the one below used in an automobile gear box). Such shapes ultimately allow for lighter (and more cost efficient) structures to be created
Supply chain optimization – Traditional manufacturing is either very labor intensive or very land/material intensive (and sometimes both). This has made it more prevalent in developing countries which are generally more cost competitive on both fronts. Whilst this can be a good thing (especially for consumers that benefit from cheaper prices), it does pose supply chain issues, which we all felt during the COVID pandemic as cross border flows were negatively impacted. Ultimately, the mobility of 3D printing means that supply chains can be shored up in developed countries, especially for time critical supplies (such as medical and industrial equipment).
3D Printing is set to grow exponentially
Although the technology has been around for over 30 years, 3D Printing is still in it’s very early stages of growth.
The Global 3D Printing industry is only worth around $13bn currently (measured by printing machinery and service revenues) but it is expected to grow at a 60% CAGR for the next five years (and at 25% CAGR for the next 10 years). (Even the lowest growth estimate I found online was assuming 20% CAGR for the next 10 years). This ultimately means that the industry is going to grow from being worth $12bn today, to over $125bn by end 2025.
Additive Manufacturing 2.0
The reason this industry is set to grow so fast is because it is going through a disruptive phase right now. Whereas initially 3D printing was used exclusively for prototyping (complementing traditional manufacturing), it is only now starting to compete with mass production. This is what is referred to as ‘Additive Manufacturing 2.0’.
This competition with traditional manufacturing is being fought on three fronts:
- Mass production technologies
- Expansion in materials inputs
- Production of end-user parts
Resultingly, the most successful 3D printing company will be one which has the best technology to mass produce parts, has the widest selection of materials and that can be used directly in the creation of end-user parts.
Market Players
There are many companies operating in the 3D printing space. However, the biggest pure-play 3D printing companies that are publicly traded are: 3D systems (DDD), Desktop Metal (DM), ExOne (XONE) and Stratasys (SSYS).
Whilst these companies have a lot of similarities, this is how I would characterize them versus one another.
3D Systems: The Dominant Player
3D systems is the largest company (by market cap) and is the self-proclaimed leader in the 3D Printing space. They have been around the longest (around 35 years) and are generally considered a legacy producer with a metals, polymers and plastics 3D printing businesses. In recent years, they have tried to build out their regenerative medicines business and have signed numerous partnerships to do so in this space. They have 100+ materials under patent.
ExOne: Legacy Binder Jetting Printing
ExOne is the market leader in legacy Binder Jetting 3D printing technology (which uses a binder to effectively glue together the different layers of material used to create parts). They have been in the industry for 20 years. They have 230+ materials and have the largest market share of Binder Jetting based 3D printers, globally.
DM: New kid on the block
DM is the disruptor in the industry. Whilst initially a metals focused 3D printing business, they have developed their polymer business through acquisitions this year (Envision Tech and Adaptive 3D). They also boast the fastest Binder Jetting technology in the market, which they refer to as ‘Single Pass Jetting’. This is about 7x as fast as the legacy system (used by ExOne). They have 225+ materials and very strong VC backing (Ark Invest, Social Capital, Ford, Google Ventures).
Stratasys: Legacy polymer 3D printing
Stratasys is focused on polymers (mostly plastics) printing (and not metals printing). As a result, they use slower (legacy) technologies for their 3D printing machines (FDM technology) and have a more limited customer base. They have been around for 30 years.
Financials Comparison (COB July 5th)
Revenue Growth
Firstly, all four companies are expected to grow revenues considerably this year. That being said, the Revenue CAGR for the largest players has actually been negative (over 3-5 years). This tells me that they are conceding market share to new entrants (and likely at a considerable rate given how quickly the industry is growing).
Cash Rich
Second, all four of these businesses have a lot of cash. The cash on balance sheet covers free cash flow for these companies for at least the next 4 years. This means that despite having negative Free Cash Flows (due to high capex spend and lower revenues), these businesses can likely maintain operations without dilutive equity fund raising rounds.
EV < Market Cap
Finally, I see a lot of people look at Price to Sales (or Price to Earning) multiples for stocks. With businesses like these which have a lot of cash on the balance sheet, this is the wrong approach. Enterprise value (which accounts for market plus debt minus cash), gives a more accurate picture of how these companies are valued. Intuitively, the enterprise value is what you’d pay for a company if you tried to buy it entirely (i.e. you own the equity and the debt). On this basis, all four companies trade still trade at a sizeable premium to forward expected revenues (but this is no way near as overvalued as typical P/E multiples would imply).
My Stock Pick: Desktop Metal (DM)
DM appears to fit my requirements the best. Financially, they are experiencing the fastest revenue growth and although they trade at the highest multiple of sales (EV/Sales), their growth is coming at the expense of the legacy entrants (that likely cannot compete with DM’s proprietary technology, such as the Single Pass Jetting System).
DM also has the strongest balance sheet. This is a reflection of the strong VC backing DM has (which has allowed it to achieve a sizeable valuation very early on). This protects the business from likely continued negative Free Cash Flows as it invests in its business during this growth phase. At this rate, DM has at least 7 years of cash to fund it’s Free Cash Flows.
Investment Risk/Reward
Assuming DM can achieve revenues in line with market consensus estimates for the next two years, continue to grow in line with broader industry growth (circa 60%), and achieve optimized margins of 20-30% (its competitors are already achieving 40% Gross Margins), I do think DM has the potential to achieve 90% return in the next five years (assuming a relatively low 20-25x earnings multiple).
It is worth highlighting that a lot of these assumptions are ‘de-risked’ as due to its order back-log, DM can already have a high level of confidence in its Forward Revenue Guidance (which is to clear $100m this year and achieve $1bn in revenues by 2025). In fact, the company has already sold out its printing machines until the 1H of 2024 (making me more confident that these revenue figures will be achieved). In the bear case scenario where growth rates and margins lag , I see 29% downside from the current share price.
Conclusion
3D Printing is still in its very early stages of growth. However, DM offers an opportunity to invest in the future and to achieve outsized returns versus it’s competition. Given that there is still a lot of growth to be felt, the price action is likely to be extremely volatile until we see continued revenue growth (likely Q4 of this year when DM’s new printers begin shipping). That being said, for the long term investor, I think DM offers an unrivalled investment opportunity.
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