Last week, I wrote a brief primer on the 3-D industry. With this article, I wanted to take a look at the companies in this area of the market.
There are basically four major companies that I follow in the 3-D biz. On the software side there are Autodesk (ADSK) and PTC (PMTC). On the 3-D printing side are Stratasys (SSYS) and 3D Systems (DDD).
Last month Autodesk announced lackluster second-quarter earnings, which surprised many investors. The company guided third-quarter revenue to between $540 million and $555 million, which was below the consensus of $580 million estimate. Autodesk is facing tough competition in the 3-D software business from the likes of Stratasys and 3D Systems. The majority of Autodesk's revenue still comes from 2-D architectural- and engineering-design software.
Autodesk plans to hold an analyst meeting in October, and management should then provide more detail on new products and the company's transition to a subscription-based business model. Autodesk is also testing a software-rental and usage-based business -- and, in my opinion, that clouds the company's outlook. The transitional nature of Autodesk's model makes we want to stay away from the stock. I would avoid Autodesk until we can get more clarity on the company's outlook.
PTC, the software company formerly known as Parametric Technology, has been undergoing quite a few changes. When I followed this company in the 1990s, it was almost exclusively a 3-D-design software company. Back in the day, PTC's flagship product was called Pro/Engineer. Eventually, as computers became more powerful and networking grew, engineering teams needed to collaborate during the design process. PTC brought out the de facto industry standard 3-D software for manufacturing, called Windchill. Today, in its 10th version, Windchill is used to design the most complicated parts and subassemblies known. If you need to design a jet engine, you use Windchill.
The power of the Windchill suite made it a must have for any large manufacturing company. But, over the years, sales slowed and PTC acquired a number of companies and technologies to assist manufacturing firms with the production and management of their data.
As with Autodesk, it's hard to get enthusiastic about PTC. At the end of July, the company reported that third-quarter revenue grew just 1.6% to $316 million -- way below consensus. The company cut fourth-quarter guidance, as well, guiding to a disappointing $1.28 per share in earnings for fiscal 2013 (ending September). PTC, therefore, is another name I would rather avoid.
The other two companies I follow in the 3-D business are the machine-makers and, for me, they are the most exciting.
Stratasys leads the market with a technology called Fused Deposition Modeling (FDM). FDM machines build parts layer by layer, by way of heating thermoplastic material to a semi-liquid state and extruding it according to computer-controlled path. 3D Systems leads in the photopolymerization market. Photopolymerization is achieved by striking a light-sensitive liquid material with a laser. The material hardens into the desired shape.
Both companies claim their technology produces the best parts. Stratasys has about 95% market share in the FDM business, which is about 45% of total industry revenue. Photopolymerization makes up about 21% of the overall market, and 3D Systems is believed to have a 99% market share in it.
While I like both, I prefer Stratasys. The company recently acquired Makerbot, the Kickstarter-funded 3-D printer. Stratsys estimates there were 35,000 to 40,000 desktop 3-D printers sold last year, and Makerbot accounted for approximately 25% of those.
In terms of revenue, both companies are roughly the same size. Wall Street expect Stratasys to have revenue of $465 million, and 3D Systems estimates are running at $504 million. Stratasys is expected to grow the fastest: Analysts estimate growth at an astounding 116% vs. just 42.5% for 3D Systems. Of course, the valuation for both are crazy. Both companies trade between 35x and 40x calendar year 2014 estimates, but that's not a big deal for momentum investors.
The biggest risk in the 3-D-printer business is the speed of adoption. While lots of hipsters are buying $1,500 3-D printers to print knickknacks like rings and bracelets, I think the $1,500 (and below) price point will open up the 3-D printer market to a wide range of small- and medium-sized businesses that couldn't afford an $80,000 professional setup.
Top-line revenue growth and margin expansion, from increasing sales of consumables, will send these stocks into a higher dimension.