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Morningstar | Lowering FVEs for 3D Printer Companies After Reviewing Market Assumptions

After reviewing our outlook for 3D Systems and Stratasys, we are maintaining our no-moat ratings, lower our fair value estimates, and downgrading Stratasys’ stewardship rating to poor. Our fair value estimates drop to $11 per share from $14 for 3D Systems and to $20 per share from $24 for Stratasys. Today’s 3D printing market is characterized by intense competition, low barriers to entry, and rapid development cycles. Since 2014, both manufacturers have struggled to register economic profits as a dearth of new supply across the 3D printing value chain handcuffed supplier pricing power. According to Wohlers Associates, 135 companies sold industrial additive manufacturing systems (units priced above $5,000) globally in 2017, compared with 97 companies recognized in 2016 and 62 reported in 2015.

Stratasys and 3D Systems rely on a razor-and-blade model to drive deeper penetration into several end markets, including aerospace, automotive, healthcare/dental, and industrial manufacturing. With gross margins for printers having fallen below 30% thanks to a wealth of competing printers available in the consumer and industrial markets, both companies sell printers at or below their cost of capital while attempting to sell services and materials at higher margins, close to 50% and 70%, respectively.

Combined, Stratasys and 3D Systems command roughly 18% of the additive manufacturing total available market, which includes printer, software, and materials sales. However, we expect the market share owed to those manufacturers will erode over time. With the total available market growing from $7 billion in 2017 to about $45 billion in 2027 at a 20% compound annual rate, we believe 3D Systems and Stratasys’ combined market share will decline to close to 10% as new competitors and industrial stalwarts launch new printing systems and services. We believe 3D Systems is higher quality due to its clean balance sheet and slate of new products, but both names look fairly valued.

Going into 2019, we expect the supply overhang will persist, and growing competition will pressure operating results in the coming years, but consolidation in our midcycle period will tighten supply and drive incrementally higher profit margins. That said, we believe it will take several years for Stratasys to change course and turn a profit, given the decelerating growth of its installed base and persistent price pressure. Nonetheless, the pace of recent innovations, the influence of Objet leadership, and the prerequisites for Stratasys’ new CEO indicate the company is shifting from its innovation-fueled founding toward a more sustainable operational structure that will support growth around its current core of products.

Conversely, we expect recently launched units under the NextDent and Figure 4 platforms, which target customization opportunities, and high-volume finished parts will allow 3D Systems to generate stronger results in the current 3D printing environment. The company has successfully launched new products into a bevy of end markets, but most important healthcare and dental, which now contribute about 30% to its revenue. While 3D Systems isn’t exempt from near-term operating margin pressure caused by the supply overhang and growing competition, we do expect its pipeline of materials, software, and printing technology will help drive an operating margin rebound through the back end of our forecast.