Each year, research firm Gartner releases its Hype Cycle for Emerging Technologies report -- it is an interesting look into the innovations that will shape our lives and the fevers that will catch Wall Street.
The "Hype Cycle" maps new tech ideas from an innovation trigger through inflated expectations and eventually to productivity. I find the name an apt description for anyone investing in the markets and the often-times ridiculous valuations around companies involved.
Here's how the cycle typically works: First an innovation becomes commercialized and companies must rush to go public fast enough to meet the boom in investor expectations. When the market realizes that profitability is still years away, the crash begins. Only those companies with the market share and balance sheet strength to survive make it to profitability.
As with all financial busts, disillusionment can take the good down with the bad and this sentiment often sinks a stock much further than a rational look at the outlook would suggest. Then when the market catches even a glimpse of profitability, the leaders' stocks boom.
The 2015 Hype Cycle report shows that the 3D printing industry might be ready to take that last step into profitability. I've found two survivors in the space have lost more than three-quarters of their market cap -- but could be on the verge of that boom higher.
The Collapse of 3D Printing Stocks
The history of 3D printing can be traced back to the late 70s with inkjet printers. but it wasn't until 1984 when Charles Hull, co-founder of 3D Systems (NYSE: DDD), invented the process of printing a three-dimensional object from digital data. That is when the industry really started to take shape. From there, the industry started building parts for the automotive, aviation and manufacturing industries. In 2002, the first working kidney was created with a 3D printer.
DDD issued shares in 1990 but it wasn't until just the past five years that the market started getting 3D-fever, sending shares of printing companies through the roof. Shares of 3D System surged more than 24-fold over the three years to December 2013.
The hype around 3D printing led to massive capacity being built even as most of the companies in the space were still unprofitable. As anyone that has invested in new tech too early can tell you, the collapse has been spectacular. DDD has lost nearly 87% of its market cap as the hype bled out of the industry.
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But the new Gartner Hype Cycle graphic, along with one very important development, may just mark a turning point for the industry.
Notice which innovation is furthest along the curve?
In a separate report this year, Gartner delivered its expectations for a 103% increase in 3D printer shipments next year to 496,475 units on rapid quality innovations and a strengthening consumer market. As 3D applications become more broad-based, the firm expects shipments to double every year reaching 5.6 million through 2019.
A recent development leads me to think that 3D tech may soon find the mass audience it has needed for commercial feasibility. 3D Systems recently partnered with the TV show Project Runway to launch a new collection of fabricated designs for textile 3D printing.
It is this evolution into consumer goods that could drive the rebound in 3D printing. Consumer spending will not only present a huge source of demand for 3D-printed products but can help bring prices down on printers.
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Gartner predicts that the under-$1,000 printer segment will account for 40.7% of the market in 2019, up from 25.5% today. The introduction of consumer uses and lower prices could help the technology go mainstream and lead to a surge in sales.
Tale Of The 3D Printing Tape
While shares of 3D print companies are down more than 70% since the beginning of 2014, the two industry leaders control roughly 34% of the industry's $4.2 billion in annual sales.
While Stratasys (Nasdaq: SSYS) is the larger of the leaders with 18% total market share, I like 3D Systems (NYSE: DDD) on its profitability and cash flow. Revenue growth is expected to be 16% higher next year and the company books nearly a 50% gross margin, both well above metrics for its larger rival. 3D Systems booked a second quarter of increasing printer sales for its core polymer and metal printing units in the second quarter, a potential sign of a rebound in demand.
|Balance Sheet Cash||$171||$352|
|Cash Flow Operations||$25||($8)|
|Free Cash Flow||($1)||($92)|
|2016E Revenue Growth||16.0%||13.8%|
Both companies have enough cash to survive as smaller competitors get pushed out and growth catches up to capacity. 3D Systems had $171 million in balance sheet cash last quarter, enough to cover 171 months of its $1 million loss in free cash flow. Stratasys's cash reserves of $352 million are enough to cover nearly four years of the company's $92 million free cash flow loss over the last four quarters. Both companies booked large reductions in cash last year on acquisitions but are slowing the pace of purchases and consolidating around their core products.
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It seems I'm not alone in my outlook for shares of DDD. Insiders at 3D Systems have bought $720,040 in shares since August at an average price of $12.85 per share. Institutional shareholders increased their position by a net $1.9 million in the second quarter with technology hedge fund Coatue Management increasing its position to 4.7% in the quarter.
There still could be bumps along the way in the rebound for 3D printing stocks but it looks like the market may have found its bottom. Consistent growth and the evolution into new applications will drive fundamentals and the two market leaders have the staying power to survive until the market realizes the selloff has gone too far.
Risks To Consider: Growth still needs to catch up to capacity in the 3D printing space and shares could be volatile around earnings releases. Take a position in the best of breed now but be ready to wait the theme out for a few quarters.
Action To Take: Take advantage of poor investor sentiment around 3D print technology to position for double-digit growth. Of the two market leaders, 3D Systems is the strong favorite with higher profitability and a stronger outlook.
P.S. Want to know how you can profit from the latest technological developments? StreetAuthority's Andy Obermueller is putting the final touches on his annual predictions of the most under-the-radar profit opportunities for the coming year. In it, you'll learn about Google's potential move into the real estate business... how a new form of wearable technology could triple sales of the soon-to-be-released Apple Watch 2... and much more. Be the first to read the report when it goes live. Sign up here.