May 04, 2018 – 3D Printing: Investors Better Off With Service Pure-Plays


During the week, several 3D printing companies reported their earnings with Stratasys (NASDAQ:SSYS) posting disappointing results. 3D Systems (NYSE:DDD) also reported mixed results.

One trend that is becoming clear is that service providers are benefiting from the growth of 3D printing while printer manufactures continue to struggle.

Stratasys earnings

Stratasys, one of the leading 3D printing companies, posted disappointing quarterly results. Revenue declined 5.7% year-over-year to reach $153.8 million. Revenue was short of analysts’ consensus of $167.5 million. Earnings also fell short of estimates as the company posted 5 cents in earnings per share. Wall Street was looking for 9 cent a share.

Despite poor results, Stratasys is sticking to its full-year guidance. The company expects mid-point revenue to reach $685 million during 2018, which is slightly ahead of analysts’ consensus of $679 million. Non-GAAP earnings per share will reach 40 cents a share during the fiscal 2018 compared to analyst consensus of 42 cents per share. The stock is down  about 13% since earnings release.

What’s happening to the top line?

The management noted that the decline in revenue was “primarily attributed to underperformance in North America related to high end system orders, specifically from customers in government and other key verticals such as aerospace and automotive.”

Expiring patents and increasing competition

Although the management is convinced that the performance doesn’t reflect a long-term trend, the competition in the industry is increasing. There are not much barriers to entry due to expiration of key 3D printing patents. Most of Stratasys’ fused deposition manufacturing (FDM) patents have expired, which is putting pressure on the market share. Due to expiry of patents, customers are now turning to cheap local manufacturers. Piper Jaffray also lowered their price target for Stratasys citing “intensifying competition.” It seems that patent expiry has brought in a lot of players in the market.

Service providers

Due to proliferation of 3D printing technologies, service providers (on-demand printing companies) are taking a toll out of system manufactures’ revenue. For instance, Materialise N V (NASDAQ:MTLS), a Belgium based printing services company is using printers from multiple providers including, among others, Stratasys, Hewlett-Packard (NYSE:HPQ), 3D Systems and EoS GmbH. Note that Materialise reported a 37.5% year-over-year growth during the first quarter of 2018 as compared to 4% decline registered by Stratasys. Increasing number of services providers put a serious price pressure on printer manufacturers like Stratasys. In short, service provides will continue to eat into manufacturers’ top-line.

The fact that Materialse reported revenue growth while Stratasys registered revenue decline doesn’t reflect well on Stratasys’ printer sales business. As service providers use printers from several manufacturers, decline in Stratasys’ revenue indicates that it’s facing a hard time selling its printers in contrast to others.

3D System earnings, mixed results

3D Systems has done better than Stratasys this quarter. Although the company missed bottom line consensus by 4 cents, the company managed to post 6% year-over-year revenue growth. Revenue came around $165.9 million. Printer sales grew 8% while service revenue grew 2% during the first quarter of 2018.

Lags industry

Increases in printer sales indicates that customers are favoring 3D Systems’ products over Stratasys. The company is also doing well in the dental care industry. However, this isn’t a satisfactory performance when benchmarked against industry growth prospects. 3D printing is expected to grow at 15% during the next five years or so, fueled by metal printing.

A problem for printer manufactures

The problem for 3D Systems, and other manufacturers, is that service providers are gaining traction. Although 3D Systems provides printing services, it only uses in-house printers to do so. This creates a competitive limitation for the company in services business as services pure-plays can offer several printing technologies to their customers. Just see that Materialise offers several printing technologies from different providers; it’s hard to compete with that as a printer manufacturer. That’s why we see that 3D printing service providers like Materialise have increased their revenue by ~37% by providing on-demand printing services while 3D Systems only managed to post 2% growth in services.

Materialise’ growth potential is cheaply priced

The market is already pricing service providers higher than printer manufacturers. See the chart below:

It can be seen that the market started to ascertain the benefits of service providers over printing manufacturers since the second half of 2017. On a forward basis, the valuation of Materialise looks even more attractive than printer OEMs like 3D Systems and Stratasys.


Notes to the table: The ratio is calculated using the forward price-to-sales of each company divided by the expected growth consensus of the next five years.

It can be seen that, despite trading at a higher price-to-sales ratio, service provider Materialise is cheaply priced in terms of potential future growth. Note that earnings of Materialise are expected to grow at 79% p.a. during the next five years.

Takeaways

Service provider will probably enjoy higher growth and margins going forward. Given service providers ability to offer several technologies from different providers is an attractive proposition for customers. Moreover, on-demand services allow customers to keep their capex lean, which is a powerful factor in a buy or outsource decision. The point is service providers are better positioned than printer manufacturers to benefit from the growth prospects of 3D printing industry.

From an investor perspective, service providers might provide better risk-reward proposition in 3D printing arena going forward.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.





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