This Industry Is on Fire, but Is It Still a Buy?
Apr 23rd 2012 2:47PM
Updated Apr 23rd 2012 3:56PM
For seasoned and beginning investors alike, there's nothing that can match the feeling of seeing a big holding pop in value. Last week provided lots of opportunity for investors to celebrate in the quickly growing field of 3-D printers.
But while these moves may be exciting, the market is a forward-looking instrument. The question now becomes: Are these companies still buys? Below, I'll show you why I think you'd be silly to let last week's pop stop you from investing in these companies, and at the end I'll offer you access to a special free report detailing three stocks to own for the next industrial revolution.
First: Why the pop?
Last week was full of consolidation within the 3-D printing industry. By the end, both 3-D and Stratasys had emerged as the dominant players.
Stratasys started things off by announcing that it was merging with privately held Israeli company Objet. The move pays off in two big ways. First, it offers the combined company access to 70 foreign markets, significantly expanding Stratasys' international presence. And second, by combining the technology of the two, the newly formed company will be able to tap into new markets that wouldn't have otherwise been reachable.
3-D, which experienced its own pop as a result of the Stratasys merger, had further news to deliver on Tuesday. 3-D declared that it would acquire Paramount Industries. Though Paramount uses essentially the same technology as 3-D, Paramount has sales channels developed in the aerospace and medical device industries -- two areas of potential growth for 3-D.
Next, let's cover the numbers
Before diving into the future of the industry, it's a good idea to look at their valuation metrics.
Price/Free Cash Flow
P/E to Growth
|S&P 500 avg.||14||1.3||N/A||N/A|
Source: Yahoo! Finance; Vector Grader. N/A = Not available.
As you can see from these metrics, both of these companies are richly valued when compared to the broader market. That's an important factor to consider before investing. It's clear the market has very high expectations for these companies, and if they fail to execute on their plans, their stocks will be punished accordingly.
Here's why I'm bullish
The first thing you need to wrap your head around is what 3-D printing actually is. By having the specs for an object, a 3-D printer can create a real-life replica of that object. Some people -- including our own David Gardner -- believe we could one day be printing out birthday presents, furniture, and even food with the use of these machines.
At first, this technology was primarily for the use of engineers. They were able to build prototypes of designs and evaluate those designs immediately by printing them out.
But the market for 3-D printing is quickly expanding from design engineers to a much wider audience. Industry researcher Terry Wohlers recently reported that 20% of the output from 3-D printers was final products, not prototypes. More importantly, that number is expected to jump to 50% by 2020.
Will you have a 3-D printer in your home by 2020? Maybe not, but it will surely have a stronger industrial presence by then, and it may make inroads to consumer use, too. The technology has a long way to go before being able to replace the factories and shops that produce our basic goods, but it will get there -- eventually.
If you take a step back to consider our history of consumption, you can see a pattern of disruption: Convenience and price are the keys to owning the future of retail and manufacturing.
First we had mom and pop stores, but as soon as Wal-Mart (NYS: WMT) came on the scene, it was able to offer up lower prices and the convenience of a one-stop shop that mom and pops couldn't match. For decades, Wal-Mart built its dominance unencumbered.
But then Amazon (NAS: AMZN) came on the scene. It has increasingly become a one-stop shop for your online shopping needs, and what could be more convenient than ordering what you want without leaving your bed? Amazon is currently in the process of building out its e-tailing moat.
Looking to the future...
The next logical disruptor would be 3-D printing. If it reaches its full potential, it would surely be more convenient than Amazon, as your product would be constructed right before your eyes. Whether that will be possible, let alone cost-effective, remains to be seen.
If you're interested in this emerging field, then The Motley Fool has a must-read special free report for you: "The Future Is Made in America." Inside the report you'll hear about 3-D printing, as well as a company not mentioned in this article that also stands to benefit from this megatrend. Get your copy of the report today -- absolutely free!
At the time this article was published Fool contributor Brian Stoffel owns shares of Stratasys and Amazon. You can follow him on Twitter, where he goes by TMFStoffel.The Motley Fool owns shares of 3-D Systems, Amazon.com, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Amazon.com, Stratasys, and 3-D Systems, and creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.