In spite of positive comments, 3D Systems Corporation (NYSE:DDD) has encountered difficulty recently. As noted in ValueWalk two weeks ago, even after an “outperform” rating the stock nonetheless fell in price — and continues to do so, today trading near $74 a share, down nearly 4% on the day. 3D Systems Corporation (NYSE:DDD) is in a bruising market share battle with Stratasys (NSADAQ:SSYS), but neither stock has matched the optimism of analysts. With P/E multiples high and skeptical hedge fund managers acknowledging their shorts of stocks that have failed to deliver on the market hype, it could be a rocky year for the 3-D printing sector, despite all the glowing outlooks.
In its recently quarterly publication, McKinsey Quarterly, authors Daniel Cohen, Matthew Sargeant and Ken Somers sound a familiar theme for the 3-D printing market: its disruptive potential and endless market possibilities. But has the hype materialized into tangible products and services that actually operate in a manufacturing environment? The publication notes 3D Systems Corporation (NYSE:DDD)’s current status as a bellwether of caution in the industry.
The McKinsey consultants note with optimism 3-D printing technology “can build larger components and achieve greater precision and finer resolution at higher speeds and lower costs. Together, these advances have brought the technology to a tipping point—it appears ready to emerge from its niche status and become a viable alternative to conventional manufacturing processes in an increasing number of applications.”
The McKinsey report runs counter to what some fund managers have been saying, including Dialectic capital, who noted in their 4th quarter investment newsletter, first reported in ValueWalk, that 3-D printing (including 3D Systems Corporation) was “in the middle of a clear valuation bubble,” noting that public hype for the industry has moved valuation past any reasonable expectation that earnings will catch up with the stock price.
3D Systems Corporation (NYSE:DDD) as example of this trend
In particular it notes market leader 3D Systems Corporation (NYSE:DDD), which lowered guidance during the 4th quarter, and where “margins have failed to expand and organic growth rates have stagnated.” The investor letter noted that despite all the hype, the high production cost of 3-D printing has failed to develop realistic solutions in actual manufacturing. “It can produce a plastic toy for $1,000 but I have yet to see anything (mass marketed) cost efficiently produced through 3-D printing.” Dialectic isn’t the only fund shorting the “over-hyped” 3-D printing market. As reported in ValueWalk, Witney Tilson also appears skeptical on 3D Systems Corporation (NYSE:DDD).
McKinsey, nonetheless, continues to tout the advantages of the market segment, pointing to five disruptive changes that could impact the category.
Accelerated product-development cycles
The acknowledged benefit of 3-D printing has always been in the pre-production environment, and here McKinsey notes the primary benefit in reducing product development time. “The ability to make prototypes without tooling lets companies quickly test multiple configurations to determine customer preferences, thus reducing product-launch risk and time to market,” the report said. “Companies could even go into production using 3-D printed parts and start selling products while the traditional production tools were still being manufactured or before the decision to produce them had been made.”
New manufacturing strategies and footprints
The report notes that in high cost manufacturing, such as aircraft components for Boeing or medical products such as hip replacements, can be manufactured through 3-D printing. The report did note the limitations of 3-D printing, saying “not every component will be a candidate for the technology and reap its benefits (cost reductions, performance improvements, or both).”
Shifting sources of profit
The third disruptive component the report cited was the way in which companies could add value to their products or services. “The outsourcing of conventional manufacturing helped spur companies such as Nike to rely more on their design skills,” the report said. “Likewise, 3-D printing techniques could reduce the cost and complexity of other kinds of production and force companies to differentiate their products in other ways. These could include everything from making products more easily reparable (and thus longer lived) to creating personalized designs.”
The report noted that current product design methods are limited by methods of production, and 3-D printing could open new avenues for design consideration. “Architects can’t design houses without considering construction techniques, and engineers can’t design machines without considering the benefits and limitations of casting, forging, milling, turning, and welding,” the report noted. “Getting the most out of additive-manufacturing techniques also involves technical challenges, which include setting environmental parameters to prevent shape distortion, optimizing the speed of printing, and adjusting the properties of novel materials. Indeed, tuning materials is quite a challenge. While plastics are relatively straightforward to work with, metals are more difficult. Slurries and gels (for example, living tissue or the material for printed zinc–air batteries) are extremely difficult.”
The report concludes by noting 3-D printing could cut the cost of market entry for new players. “The direct manufacturing of end products greatly simplifies and reduces the work of a designer who would only have to take products from the computer screen to commercial viability. New businesses are already popping up to offer highly customized or collaboratively designed products. Others act as platforms for the manufacture and distribution of products designed and sold online by their customers. These businesses are gaining insights into consumer tastes and building relationships that established companies could struggle to match.”
While the benefits and promises of 3-D printing have been highly touted, some professional investors are saying it’s time for the promise to become reality in order to hold up the lofty stock prices.