One of the most exciting investment opportunities is in the additive manufacturing (or, 3D printing) sector. Additive manufacturing is where science fiction is meeting reality. It is going to make current production methods obsolete. Companies will no longer make products in a factory to be sold to consumers. Rather, products will be designed digitally and “printed,” or stored in a database such as MakerBot’s Thingiverse. Buying simple everyday objects will be as simple as going to the Thingiverse, downloading a blue-print, and hitting “print” on your computer screen.
Furthermore, 3D printing is coming to a point where more complex items can be designed and “printed,” and the leading companies involved in generating this technology are designing products used by defense contractors, such as General Electric (NYSE:GE), and medical device manufacturers, such as Stryker (NYSE:SYK). As this technology continues to advance and as its application becomes more universal, it is feasible that the top companies in the industry will be the most valuable companies in the world.
But this incredible investment opportunity is no different than any other investment. You need to buy low and sell high. You need to be aware of company’s valuations, profitability, and their competitive positioning.
Over the past several months, investors ignored common sense investing practices and just bought the stocks of the leading 3D printing companies. The largest and most well known – 3D Systems Corporation (NYSE:DDD) — traded at just $30/share at the beginning of 2013, and at just $10/share at the beginning of 2012. It reached nearly $100/share back in early January before falling to $65/share today. This incredible price spike was simply irrational: the stock moved too far too fast. Furthermore, it was trading with a triple-digit earnings multiple despite its growth rate of just 30 percent.
But, as we see with every bull market that gets ahead of itself, 3D Systems shares began to correct, and yesterday we saw the correction reach a feverish pace. The shares fell 15 percent on news that the company’s earnings were going to fall short of expectations due to falling gross margins, and at one point, the stock was down far more than this.
This is by no means the end of the 3D printing bull market. If we look at past bull markets, we find that such volatile price action is common in a major bull market. In the 1970s, the price of gold rose from $35/ounce to over $800/ounce, but in 1975 – 1976 the price fell by nearly 50 percent. During the stock bull market of the 1980s and 1990s, we saw the market crash more than 20 percent in one day in 1987. Apple stock (NASDAQ:AAPL) fell from $30/share in 2000 to $7/share in 2002 before rising to $700/share.
This is to be expected, and while it can be painful and appear to be dangerous, we have a clear blueprint for playing a bull market. The key is to identify the bull market and to buy it on extreme weakness. This is easier said than done. If you do research and determine that a certain asset class will trade at several multiples of its current price over the coming years and decades, your instinct is to buy as much as you can right away to try to beat everybody else. In hindsight, this strategy works out — you would have done extremely well had you bought Apple at $30/share in 2000. But if you incorporated an understanding of how markets work, you could have bought the shares much cheaper when everybody else thought that the company would go bankrupt.
Making money in bull markets is much more difficult without this hindsight. I believe that 3D printing is still in a bull market. But there is still too much euphoria. I wouldn’t be surprised to see shares of 3D Systems fall further even while, at the same time, I believe that this company could be worth 10 or 20 times its current price in several years. I want to buy the company’s shares, and shares in similar companies, but I am waiting.