Saturday, March 8, 2014

Beware 3-D Printing! Barron's Cover Story

(FROM BARRON'S 3/10/14)
   It was meant to be the moment science fiction finally met reality. This
past January, makers of 3-D printers reserved 7,000 square feet worth of space at the Consumer Electronics Show. At their introductory press briefing, CES organizers described how 3-D printing was driving a new industrial revolution. The Las Vegas show floor was littered with small boxes spitting out plastic figurines and minimalist jewelry. Not exactly the stuff of a new world order in manufacturing, perhaps, but the tech world nevertheless declared 2014 the year of the 3-D printer.
      Wall Street has been well ahead of the hype. Shares of 3D Systems (ticker: DDD), the industry's largest pure-play stock, are up 370% over the past two years. Stratasys (SSYS) is up 231%. And since their 2013 initial public
offerings, ExOne (XONE) and Voxeljet (VJET), are up 140% and 166%, respectively.
Each of the companies has a slightly different focus, with 3D Systems
increasingly tied to consumers and Voxeljet strictly focused on large-scale
industrial machines.

      In each case, though, investors are missing the point -- and overpaying in
the process. Yes, 3-D printing holds vast potential; it could eventually reshape
U.S. industry. But that's because of its applications in industrial
manufacturing, which the publicly traded 3-D outfits don't address as
effectively as some private companies. The systems of those private firms have
been embraced by the likes of General Electric (GE). The industrial conglomerate
is currently using 3-D printers to manufacture key parts for its next-generation
jet engines.
      Pure plays in 3-D printing, meanwhile, seem more interested in consumer
novelties and the hobbyist market. Consider Rock Hill, S.C.-based 3D Systems,
with a market value of $7 billion. At CES, the company unveiled a dozen new
printers, including a sub-$1,000 version of its entry level Cube printer. A
few days after the show, 3D issued a press release touting a partnership with
Hershey (HSY) to create an in-home chocolate factory. The plan, 3D said, is "to
explore and develop innovative opportunities for using 3-D printing technology
in creating edible foods, including confectionery treats."
      The day of the announcement, 3D Systems shares closed up 3%. The company
has a ChefJet sugar and chocolate printer slated for delivery in the second half
of the year.
      But lately, 3D Systems has grown better at printing press releases than
profits. The company has repeatedly missed its own earnings forecasts, while
lowering the bar for the future. Early last month, shares fell 20% after
management warned about fourth-quarter earnings, blaming higher spending on
research and development.
      The stock recovered, before falling to a recent $69. Investors have made
a habit of overlooking bad news from 3D Systems. A year ago, analysts thought
the company would generate $1.31 a share in earnings for 2014. Today, the
forecast stands at 82 cents per share. The 37% haircut has been accompanied by
a 110% gain in the stock, and Wall Street remains as bullish as ever. Fourteen
analysts rate 3D Systems a Buy and four a Neutral. Just three rate the stock as
Sell or Underperform.

      3D Systems is expected to earn $85 million on revenue of $702 million
this year. It currently trades at 84 times earnings, a wild multiple for a
company likely to see per-share profit decline by three cents this year.
      The hot story for investors is 3D Systems' 37% sales growth. But even on
that basis, the valuation looks stretched. At 13 times last year's revenue, 3D
Systems is the third most expensive technology stock in the Standard & Poor's
1500, behind only Facebook, at 23 times, and Visa, at 15. Investors are pricing
all of the 3-D pure plays at premium valuations; Stratasys, ExOne, and Voxeljet
all carry double-digit sales multiples.
      Facebook and Visa have unique networks and some power to dictate pricing
on its products. 3D Systems is driving down the price of its printers, trying to
compete with a wave of upstarts.
      For all the attention on 3D Systems, Stratasys boasts the world's largest
installed base of 3-D printers, with roughly 65,000 systems. In 2010, Stratasys
partnered with Hewlett-Packard to manufacture 3-D printers under the HP brand.
By mid-2012, the companies had canceled the deal, offering little explanation.
HP recently said it plans to enter the market, though details are scant.
      In 2014, Wall Street sees Stratasys revenue growing 39%, to $674
million, with profit of $117 million, or $2.21 a share, a 20% gain.
      As for Germany-based Voxeljet, which has a market value of $540 million,
it sold a total of three printers in its most recent quarter, for $2.5
million. This was actually better than a year earlier, when the company sold
two used printers. For 2014, analysts expect Voxeljet to earn $1.1 million, or
seven cents a share, on revenue of $18 million. The stock recently traded at
      "Investors love organic revenue growth," says Whitney Tilson, manager of
hedge fund Kase Capital and co-founder of the Value Investing Congress. "The
problem is that you really have to differentiate between organic revenue growth
and profitability."
      Tilson calls 3D Systems a "dream short," and he has been adding to his own
short position of late. He's betting against four other 3-D printing names, as
well, which he declined to name. "These stocks are being valued as if this is
the next coming of the iPhone and iPad combined," he says. He describes walking
around CES seeing dozens of companies hawking essentially the same thing. "There
was booth after booth of companies with very similar products to 3D Systems. And
at lower prices."
      He thinks 3D Systems would be generously valued at three times revenue,
which would put the stock at $15, 80% below its recent close.
      While CES attendees were gawking at the 3-D showcase in Las Vegas, game-
changing developments were taking place 2,000 miles away in Cincinnati, the home
of GE's aerospace unit.
      GE Aviation is inverting age-old manufacturing techniques as it builds its
next-generation jet engine. Rather than assembling finely honed metallic parts,
GE is printing the engine's fuel nozzles layer by layer. While prior nozzles
were made of 20 different parts, the 3-D printed version is a single piece,
optimized to spray fuel into engines. The new nozzle is 25% lighter than current
models, GE says, and will last five times longer before servicing. GE says its
new Leap engine, which should see first deliveries in 2016, will reduce fuel
consumption by 15%.
      Such is the real promise of 3-D printing, which for decades has been known
by less-sexy terms such as additive manufacturing or rapid prototyping. GE says
it already has 6,000 engine orders, making Leap the most successful ramp-up in
jet- engine history. With 19 nozzles in each engine, GE is embarking on an
unprecedented 3-D printing run.
      GE got a jump-start on 3-D printing in 2012 when it acquired privately
held Morris Technologies, long a leader in rapid prototyping. Morris has
historically counted on printers from a family-owned German company, EOS, which
has nearly half the market for metal-capable printers, says William Blair
analyst Brian Drab.
      Today, GE Aviation owns 34 industrial 3-D printers, ranging in cost from
$ 500,000 to $800,000. Only one comes from 3D Systems.
      The fuel nozzle could be just the start of the additive revolution. "There
is no part of the jet engine where we are not considering leveraging additive
manufacturing," says Steve Rengers, who heads R&D for GE Aviation's additive
development center. "It's about designing without the constraints that we've
held for centuries."
      Despite the recent buzz, 3-D printing is a relatively old industry. 3D
Systems was the first to commercialize an early version of the technology, known
as stereolithography, in 1988. The expiration of patents has since ushered in
new entrants, driving down the cost of basic systems. As 3D Systems prepares to
break the $1,000 threshold, smaller rivals are already selling $500 models.
Entrepreneurs on Kickstarter are offering preorders for devices starting as low
as $199.
      At any price, 3-D printing remains slow and cumbersome. It can take a full
day or longer for printouts to cool. Gravity requires that 3-D objects be
printed with support structures attached to them, to prevent collapse.
Eventually, that scaffolding has to be removed. 3-D printers "are not for the
faint of heart," says Andy Lauta, a product manager for Adobe Systems, which
recently added 3-D print capability to Photoshop, its flagship design software.
Adobe (ADBE) is trying to solve the incompatibilities that often arise between a
desktop computer and a 3-D printer, much as it did with laser printers three
decades ago.
      If 3-D printing transforms the world, software will play a crucial role.
In that sense, names like Adobe and Autodesk (ADSK) are a safer and more
diversified way to play 3-D printing. France-based Dassault Systemes (DASTY) is
another software firm likely to play a role in any 3-D success.
      The actual challenges of making a 3-D object often gets left out of the
hype, says Terry Wohlers, the industry's highest-profile expert. His Wohlers
Associates was founded in 1986 to track new design and manufacturing
      As Wohlers sees it, people say, " 'Wow, I can do these really high-end
metal parts on a $500 machine. You push a button and out pops a shiny part.'
But there's just a lot that goes into building a good quality part." He points
out that home photo printers have essentially been a bust because of the time
and commitment required to get a quality print. And 3-D printers, he says, are
"an order of magnitude more messy than a photo printer."
    Nevertheless, investors were thrilled last May when 3D Systems said it
would begin selling its Cube printers at Staples. The stock jumped on the news,
and within a month, 3D Systems shares had risen 25%. Nearly a year later,
there's no word on the partnership's success. But Drab, who covers 3D Systems
for William Blair, has offered sobering evidence. Last September, he called 112
Staples stores. Only four had a Cube on display, and he could confirm only two
sales. Drab has an Underperform rating on 3D Systems.
      3D Systems says it has sold 22,000 consumer printerssince launching its
consumer initiative in 2012. The company declined to talk with Barron's.
      Shapeways is a venture capital-backed firm building its business around
the limits of at-home printing. The company prints consumer-uploaded designs for
personal or commercial use. Shapeways isn't messing with low-cost printers; it
uses machines that range from $60,000 to over $1 million. Some come from 3D
Systems, Stratasys, and ExOne, but, like GE, Shapeways relies on EOS for much of
the heavy lifting. "They've just refined it a little bit more than some of the
others on the market," says Shapeways executive Duann Scott. "We push these
machines to the absolute limit." Shapeways is printing 120,000 objects a month,
from smartphone cases to earrings to ceramic bowls.
      Other companies are trying to capitalize on the 3-D opportunity. Ford
Motor (F) says it's using 3-D printed prototypes to test parts of new cars. An
engine prototype, printed from a sand-based material, costs $3,000 to make and
is available in four days, Ford says. A similar prototype used to require months
to create at a cost of a half-million dollars.
      But even Ford can't resist a little hype. On a corporate Website about 3-D
printing, the company describes the future: "One day, millions of car parts
could be printed as quickly as newspapers and as easily as pushing a button on
the office copy machine." One day, maybe -- but not just yet.
      Pull Up a Chair and Take a Look
      What if we've always been wrong about how to make a chair? Technology is
forcing the question.
      Autodesk, a pioneer in computer-aided design, or CAD, software, is
increasingly bringing information about the real world -- think 3-D models of
urban landscapes and homes -- into its software. The goal is for a designer to
input a function, letting the computer dictate the most efficient design.
      One such design is sitting on the desk of Jeff Kowalski, the chief
technology officer at Autodesk. It's a model of a chair, printed in titanium on
a 3-D printer. Legs have been replaced by something similar to roots or veins.
"I asked the computer to build me a structure that is as light as possible but
still holds the person sitting on it," Kowalski says. "This is what's so cool:
We've got this superflexible fabrication technology that doesn't care about the
form. We're now liberated to use the computer to find new forms that even better
satisfy our goals and constraints in design."
      -- A.E.

  (MORE TO FOLLOW) Dow Jones Newswires
  03-08-14 0013ET
  Copyright (c) 2014 Dow Jones & Company, Inc.

Company Symbols: $ADBE $ADSK $DDD $F $GE $HPQ $HSY $SSYS $VJET $XONE

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