Should You Invest In 3D Printing Stocks?
Last year 3D Printing stocks were all the rage. 3D printing was supposed to change the way that products were manufactured. People believed that in a few years time that everybody would have a 3D printer in their houses, just like everybody now has a computer. If you needed to buy a toothbrush or a screwdriver you could just go online, download the blueprints, and “print” one of these items.
For this reason investors bid up the shares of 3D printing stocks to incredible valuations. Here are just a few examples.
- 3D Systems (NYSE:DDD) traded at $10 per share at the beginning of 2012, at $40 per share at the beginning of 2013, and it reached a peak of $97 per share. The company earned just $0.44 per share last year.
- ExOne (NASDAQ:XONE) started trading in February of last year at about $30 per share. It reached nearly $80 per share last summer. The company is losing money, and it had sales of about $3 per share last year.
- Organovo (NYSEMKT:ONVO) traded at under $2 per share in 2012. It reached a peak of over $13 per share in 2013. The company has no revenues.
- Voxeljet went public in October of last year at about $25 per share. The stock quickly rose to $70 per share. The company has just a few million in sales despite a valuation that reached $1 billion.
It didn’t matter whether these companies had sales or earnings. They were simply “must own” stocks because they were a part of this next big thing.
The problem is that sales and earnings matter to valuations. Ultimately they are all that really matter. With this being the case fundamentals eventually began to catch up with these companies. We now have 3D Systems and Organovo trading at less than half of its high, ExOne trading at less than a third of its high, and Voxeljet trading at about a fifth of its high hit in November.
But just because these stocks are down doesn’t mean that the aforementioned thesis is incorrect. 3D printers are amazing devices that have already changed the face of manufacturing. Many of these companies have deals with major defense contractors and medical device producers, and their products help these companies design prototypes of new products. 3D Systems and Stratasys (NASDAQ:SSYS) — another major 3D printing company — have products available for retail clients to put in their homes. While the technology is still too young for the average person to be able to 3D print any common household item he or she wishes there is a wide array of things that he or she can 3D print.
Given this it might be time to begin looking at 3D printing companies. But as an investor in this sector you need to be extremely careful and discriminating. Here are a few tips.
First, look for companies with more than just a “story” and surrounding hype. For instance Organovo is focused on 3D printing liver tissue with the hopes of someday being able to create viable organs for humans to use. But this is likely years, if not decades away. For now the company plans on 3D printing liver cells for pharmaceutical companies who need them for testing. But this is already a very crowded market, and there is no concrete evidence that Organovo’s product will have an advantage over existing products. So I think this name is probably hype driven.
Stratasys, on the other hand, has numerous patents, strong revenue growth, gross profit growth, and clients ranging from Stryker (NYSE:SYK) — a synthetic hip and joint producer — to General Electric (NYSE:GE). While this company isn’t cheap, especially since its shares have markedly outperformed, it is well positioned to benefit from the 3D printing revolution.
Second, buy on weakness. Stocks with a lot of growth in a fledgling industry can exhibit incredible price swings. 3-D Systems went from $10 per share in 2012 to $97 per share late last year to $46 per share today. Throughout this the fundamental picture didn’t really change much, but public perception did. If you fully understand the story then you will have the confidence to buy these names on weakness. You probably won’t pick the bottom, but in ten years that won’t matter much.
Third, don’t buy all at once. As I just said you probably won’t pick the bottom. If a stock can fall 50 percent it can fall another 25 percent. So put on half of a position, or a third. If you have regular income that you allocate to your investment portfolio then dollar cost average. Set a specific amount of money aside to put into your favorite 3-D printing companies and buy when you get your paycheck. This way you won’t be emotionally swayed by volatile price action.
Ultimately if you are buying 3D printing stocks you are doing so because you believe that these companies are going to revolutionize manufacturing. They have already begun to do so but this is a drawn out and laborious process. The fantasy of being able to order something and have it 3D print in your basement overnight is probably five to ten years away, so it follows that this is your investment timeline. If you think in these terms then you will be able to ignore the hype and focus on the companies with the strongest fundamentals when their share prices are weak. This is how you will make money in this sector.
Disclosure: Ben Kramer-Miller is long Stratasys.