Anyone considering buying 3D print stocks needs to tune into this reality check by The Motley Fool, Steve Heller. Today’s guest is Steve Heller from the Motley Fool on 3D print stocks and investments. I am excited to get hooked up with him. We’ve want to talk with authority on the state of the 3D printing industry form a business and investment perspective. He is a 3D printing specialist, and their website is www.fool.com. He writes all about investing in the 3D printing industry. He’s got a pulse on what is happening there and has great sources inside the companies. He hears things from 3D Systems, Stratasys, and GE. He also goes to major trade shows too and has got a lot of knowledge to share. We have a lot of conjecture about these things on how to make a sustainable business.

Listen to the podcast here:

3D Fool’s 3D Print Stocks Reality Check

Steve, thank you so much for joining us to talk about 3D print stocks and investing. We are so excited to have someone to talk to about the investment in company’s side of 3D printing.

I’m happy to be here. Thanks for having me on your show and just a disclaimer, we are going to talk about stocks and investing, but this is not tailored to any individual. Everything we say here is not a recommendation for the buy or sell stocks in anyway. This is another perspective on the investing landscape.

I want to understand what the landscape of 3D print stocks is. There are not quite as many companies as people think in the 3D print industry that are public.

There is only like two major companies that control about 30% of the worldwide revenue that are publicly trading in the 3D printing space. That is 3D Systems and Stratasys. They sell 3D printers, act as a service bureau and also make parts for customers, and they obviously have a big material business. That’s is the big companies. There are some peripheral companies like Proto Labs where they only make a fraction of their revenue from 3D printing services. There are other smaller companies that are more specialized and more niche- like, like Arcam, which is a Swedish based metal 3D printing provider using electronic beam melting technology. There are lots of companies, but one I want to note is Materalise, they are providing software for service bureaus. They are capitalizing on the growth from the software.

That doesn’t cover the idea that 3D printing is impacting other major stocks like HP or others?

These are more the pure play 3D printing companies. HP is going to start offering a 3D printing companies. The actual impact of having a printer for their business may be difficult for the investor to capitalize on. It is just a small overall base of their total revenue. HP is a juggernaut in the space in terms of revenue and resources. They are trying to create and drive a step change in 3D printing with their new fusion jet systems that are coming online here. In terms of actual business opportunities for them, they are going in the market share while driving earnings in the beginning.

There are not as many companies with public 3D print stocks as you’d think.

Let’s talk about your thoughts on the 3D print stocks market in general. What are your thoughts on how it is moving?

I don’t know if you are familiar with the Gardener Hype Cycle, and the way that a trend that takes hold with the expectations around that. We are in the point inside the cycle where 3D print stocks are in their all time highs. A lot of investors have lost faith in the short term growth prospects. Everybody was sold in the idea that 3D printing is the revolutionary technology that will fundamentally disrupt manufacturing in a short term period. It will take decades for that to fully play out. Right now, it is primarily a prototype technology going forward. The idea is used more in manufacturing applications. What happened in the last six quarters starting in 2015, there has been a notable slow down in customer demand spending, and the working theory is that there is too much capacity in the marketplace right now in customer’s hands. What that means is instead of customers purchasing new 3D printers, they are going to soak up their additional capacity on hand to produce more prototypes – instead of buying new ones they are going to use the ones they currently have more effectively.

What we are seeing printer’s sales that are falling. The hardware of it is weak right now. We are seeing consumable sales lining up with this theory. Last quarter, Stratasys’ consumable sales were up by 11%, same with 3D Systems. Right now, there is weakness in the marketplace. Then on the other side of it, you’ve got new entrants to the field, HP and Carbon with their M1, that makes it more difficult for 3D Systems and Stratasys to remain differentiated in the market.

The reason that we started WTFFF?! Podcast was because when we started, and remember we have over 25 years of product design manufacturing, retail consumer product experience. We understand that it will disrupt manufacturing. When we started 3D printing, I was skeptical. When we bought one, it took us 6 months before I allowed us to Instagram a single item we made. We started the podcast to motivate people to stay on the learning curve because it’s easy to want to fall off of it.

Today, we can bring back design to the core of who wants to buy it. The problem is that the 3D printing market does not get that, so they do not invest in designers or product libraries that are professionally designed. They are crowd sourcing everything. It is junk.

3D Systems together with their new CEO got their end to end solutions approach where they believe that their competitive advantage is providing more than just a 3D printer with a material. It is providing the services around 3D printing, making it more valuable to the end user. It is about filling in the extra gaps that exist in the marketplace.

Everyone says they would like choice, but when you can make everything, it is overwhelming and you make nothing.

The complexity comes at a cost.

The companies that have dialed in and have a more narrow focus, seem to us, to that have a better shot of making it until the market tips.

The technology is designed for prototyping and was not meant for manufacturing. Companies are still figuring out what customers will want this technology for in the future.

To me, that is a missed opportunity of additive manufacturing, for the opportunities it does present for the final end use manufacturing in digital on demand delivery.

To get people to accept 3D printing as a technology to do that, there needs to be an awareness and acceptance in that, in which it drives adoption. It is a cycle and we are still early on in it.

Brick and mortar companies do not innovate, they evolve very slowly. They won’t change until they are forced to. They have to change their entire organizational structure from being more about boxes to designs. That is a huge cultural shift.

The retail use cases are more difficult to see. Industrial applications make sense right now in this world. Take General Electric for example, they are changing themselves into a digital company. They have an upcoming Leap Jet Engine and they are going to be 3D printing fuel nozzles and producing 45,000 of these by 2020. It is like a mission critical application. They were able to consolidate the part from 19 individual components into one single product that is five times faster and 20% more fuel efficient. That is where the value right now is driving in finished goods manufacturing. This technology has the ability to make more complicated structures.

That is a great case study of how it is shifting in various companies. Companies like GE are companies that are built on the foundation of good scientists and design engineers. They have a fundamental hiring basis for that, whereas so much of retail and other companies don’t have it. It is going to take some disruptive upstart to shift it.

It is like a proof of concept in the retail consumer space.

We talked to the head of Pinshape early on in the podcast. He was talking about how they started their business. Their business plan originally was they would be this place where professional designers can come in and work on to make projects and showing the world how great 3D printing could be. They took the investors advice and the investment community shifted them out from doing something beneficial to the overall market.

Do you think that the industry is still too focused on prototyping or that they should be trying to move to industrial applications where there are manufacturing opportunities? How do you see how that’s shifted or did have it not shifted?

The awareness of companies is starting to happen. Prototyping is a saturated market. Last quarter, Stratasys printer sales were down 19%, and in the first quarter, they were down by 14%. Their models need to adapt to the future. 3D Systems CEO believes is that it is all about the manufacturing end to end solutions. They are a case study on why this is successful; is their healthcare businesses are vertically integrated. They built a solution through acquisitions. They enable customers to simulate planned rehearsed surgeries. They can 3D print surgical instruments, medical implants, and dental devices. It is from conceptualization to final product. This has been growing really well, in the first half of this year is has grown over 11% this year, where the rest of 3D Systems has fallen. This has been a nice bright spot for them.

It is their blueprint on how they are going to be successful in moving forward is emphasizing manufacturing. The challenge with that is it is a consultancy of approach. One needs to show these companies how to use the technology for the exact use. There is the challenge of getting adoption rates to grow quickly as well. It’s a slower more drawn out process that requires time to implement.

It sounds like there is a gap in understanding between companies that produce products and the technology and the potential of what it can offer. That surprises me. It is a job description gap. There is a missing link. The design labor gap is so big right now.

One of the biggest themes is that within this bubble it is well known, but to get people outside of the bubble is to have the education and expertise to use the technology in a valuable way was completely lacking. There was this huge gap. There were a lot of job openings. They couldn’t fill the positions. They made a lot of acquisitions by retaining talent and having more expertise in it. It is a small industry to begin with.

General Electric was building a 3D printing lab so that all their employees can have access to it and use it whenever they want for them to learn the technology and figure out how it can be beneficial for their job. Some companies are taking a serious look on 3D printing. They need to invest internally and sort of make their own maker spaces for their engineers to learn how it benefits the business ultimately.

We interviewed a company called Moxie and they are doing the same thing. Where do you think the whole desktop 3D printing industry fit in the world? Is there some significant growth still to come there? How do you see the desktop industry?

It has been a difficult space to make a profit in because it is so heavily commoditized. There is so much competition. All 3D printers, they are all essentially RepRap clones. 3D Systems exited the consumer business and cost them 2% of the year’s overall revenue. The profitability is still in professional applications. The smaller desktop oritented 3D printers are valuable from an engineers perspective, but there is so much competition in the space, it is like a race to the bottom in terms of pricing and creating a long term growth. It is a tough industry that became over saturated with supply. Now, the market is trying to work through the next step. 3D Systems exited the business. Stratasys with Makerbot outsourced their manufacturing now to Jabil. They were spending too much money in maintaining their manufacturing facilities because they have not achieved volume in the buying.

The 5^th generation Extruder had some issues and there was a fall out there. Overall, I see it as more useful in the educational space for kids in K-12 and learning how to design for the future. It is valuable if you work on a design team in automotive manufacturing plant and having it on your desk could be useful. In terms of mass market appeal, I am struggling to find the reason why it is valuable for the everyday person to adopt a 3D printer.

We are too. We do see that someone needs to stay the course and stay invested in it for that next gen situation because we don’t know yet what’s going to happen when our kids, our youngest daughters who have been exposed to 3D printing since day one, are going to get into the world and it may seem like second nature to have a 3D printer in their home.

It will drive innovation. If everything looks the same, you need to innovate to become different. I look at companies like Shapeways as interesting because you can get professional 3D printing services as a consumer. That relationship can be nurtured and built upon. It becomes a more important aspect of consumer culture.

We think the opposite. Right now, companies like Shapeways are to the industry only. You are preaching to the choir. The audience isn’t a broad enough audience. The general marketplace that is not in the know in 3D printing, do not have an understanding of the complexities of the design process. They come into problems trying to say that they want it designed, but they do not know the time it take it takes to do it. It’s not a hard and fast, “Oh it’s going to cost $100 and I’ll get it to you in a day.” Designers like us, the professional ones, don’t have time for that so it ends up for amateur designers like on Fiverr.

Ah, I thought it was like you can have a 3D printed design or a store. Like a 3D printed version of Etsy.

We like that and we agree with it, but no one in the consumer world know it’s there. We’ve talked to a few 3D print online store owners and, none of them sell any product. The most successful one made $1000 in one month, not enough for anyone to quit their day job. Etsy does better than that because Etsy attracts real shoppers. Shapeways attracts no shoppers. Why would you buy one if you know how to use a 3D printer?

It’s like another chink in the armor against driving mainstream consumer adoption of 3D printing.

It really is, and the things that have taken off on Shapeways are things like cosplay and emoticons and techie appealing things – things that women, frankly, don’t buy. The majority of Amazon and Etsy shoppers are women, they are the majority in any retail world – those things just don’t appeal to them so why would they buy them?

The use of a Shapeways shop or any kind of service bureau as a jewelry designer or entrepreneur. We’ve been getting a lot of entrepreneurs who come to us and want to do their first prototype through 3D printing and they get the idea that they can go through this “never manufacture” – that’s where we see the growth from our business stand point. The growth is there, the entrepreneurs grasp this idea of it. It’s still a cost structure basis to it, and they don’t have the money to spend at the level at which they need it right now because the cost is still too high. There are too few designers doing this.

They want to do it but it’s like they need to have someone close to them. It’s great that if they can design something and they can do it, but most of them are not CAD designers to begin with. They need someone to partner with them and come into their business and work on the CAD side to grow that. They don’t have time to learn CAD, like these jewelry designers are busy making jewelry by hand, but there is such a benefit in time savings if they can go to that level. Successful designers we have seen and profiled are the ones that have found partnership with a technical person to work with them.

So another question we have, not necessarily about 3D print stocks, but about investment in general. We have come across with a seeking capital or have a capital looking to invest it. There is a lot of interest that we see from investors wanting to be in the 3D printing space. If they are not in it, they want to be in it. What is your impression? Is it still a lot of money to be had to invest in the right venture or have you seen it cool off?

If you’re looking to invest in 3D print stocks, look for companies who don’t have all their eggs in one basket, so to speak. | Image via Flickr 401(K) 2012

I have seen it cool off. The newsfeeds of these 3D printing companies are not as active as they were at the high point. It starts to go back to the niche level coverage and things of that nature. In terms of investment opportunity, you have to think through it. Think how the company is differentiated and know their business model. What is their competitive advantage and can they sustain it? Is the price you are paying for this a good deal for the future’s earning potential? There is a lot to unpack from what I said. 3D Systems sells hardware and sell materials. That is a razor and blades model; you buy the printer, you buy the material. Utilization is the key to drive their long term growth because material sales tend to command a higher margin than the printers that they sell. That is the primary core of their business.

With Proto Labs, they are a service provider only. They provide CNC machining, injection molding, and 3Dprinting services for customers. It is cloud based, so you upload your design file and it gets turned around in just days. Proto Labs is actually a customer of 3D printing, they are tech agnostic. They are more adaptable to 3D Systems or Stratasys, because those two are the same business model. If a new technology comes along and customers demand it, Proto Labs can buy the technology and adapt it to their customers. 3D Systems and Stratasys sees it as a conflict of interest. Thinking on these perspectives, it helps you gauge if an investment makes sense. Look at it on the business perspective first. Look at if the 3D print stocks are cheap or expensive. The business comes first and the 3D print stocks comes next.

We are long term investors, and those are the business that tends to outperform the market. Finding the best investment in 3D printing and not paying too much for 3D print stocks is the one that will help you move forward.

What are some of the criteria you look when you look for that?

These are the businesses that have been a long time and have a proven track record of success. Companies that are better equipped to handle change and that can adapt better are in a better position than a company that could not do that even if their technology is better. Technology is just one aspect of it. Materials matter too. What I am hearing is the inclination to the market is that HP printers offer only one material. It may not be as valuable as people think it is. New companies coming online are plastic based. That is a plastic segment printer so plastics are becoming more competitive. Well 3D Systems, they’ve got other materials they use. Where Stratasys they are primarily plastics only. They have more to lose against competitive pressures than 3D Systems.

Right now, we are in a holding pattern. 3D printing companies are not executing well. New technologies are coming online. We will see if these can withstand the threat of increased competition.

We here are bullish on 3D metal printing.

It’s been a huge growth driver, the German company EOS is a huge contender in the metal space. They sold 300 units which was more than half of the industry’s volume for the year in 2014. They are commanding the lead there. What is driving it is the aerospace industry. When you combine the two factors of number of planes demanded and the efficiency of them, 3D printing sits very well in the middle of it. That’s why you have GE coming in with the Leap Jet Engine that improves fuel efficiency and they had to use 3D printing.

We are bullish because the design possibilities are expansive. You can do things that you cannot just machine or machine with accuracy. In the end even thought it seems like it’s higher cost, the labor trade off and accuracy level is just so high. At the end of the day the financial benefits you will see are so big.

The properties are amazing. Something I’ve been trying to figure out, and the industry hasn’t gotten there yet I should say is it is in-process quality assurance in 3D printing. Sometimes you don’t know if something has failed unless you throw it into the x-ray or CAT scan to tell the integrity of the part. Companies that can focus on improving the quality assurance during a print process will have a very huge lead in the competition. It is not easy to accomplish because you are working in harsh environments. Pedestrian solutions don’t work. It needs to be robust. Companies that focus on that would have my interest.

The textile industry does that. They have a thread by thread process. They are flying at high speeds. They have that kind of detailed analysis. They can stop a machine before an entire roll is ruined. I know something like this can happen, the focus needs to be there and somebody has to capitalize on that.

That is where I can see it working.

This has been so fascinating. I have had a great time talking with you today on 3D print stocks. Where can our listeners follow you?

They can follow me on Twitter @3DFool. My company website is Fool.com. We are covering the 3D space in a weekly basis. Hopefully you learn something on the way.

Thank you Steve. We are so glad to talk with you. Hopefully we will have you back in the future.

3D Fool’s 3D Print Stocks Reality Check – Final Thoughts

I could have talked with Steve for hours. We could have talked about a lot of things but the conversation on 3D print stocks and the market went so well where we forgot to talk about intellectual property. Hopefully, we are going to have a follow up interview with him. We got a better picture of the industrial market. We don’t get enough views of that because our podcast tends to be more educational and consumer focused. We know it is there but we don’t get enough inside look to that. To me, it is fascinating to get his perspective in the state of the industry from the commercial side and to hear what he thinks on the desktop side. From his perspective, the desktop industry is really a step child of the commercial industry.

I really like how he talks about it being a long term investment strategy to get into 3D print stocks. We get anxious today for things to go faster because it seems like they have gone really fast. I think back in the days when I was 10 years old, and using a computer in my parent’s bedroom with an archaic dot matrix printer. It takes lots of time to get to where we are now with paper printers. Now, it seems like it went really fast and there are aspects of it that it did, but it really didn’t go that fast in the first ten years.

The operating systems then are not even a typical graphic user interface. It was DOS. It was that way for a long time. It is not user friendly, which is the same complaint we have with 3D printing. It took lots of investments, companies, and tons of time to make that happen. We get impatient here in the 3D printing industry because we are like, “It is 20 years old!” But it is 20 years old and was in control of a very small group of people with a very small investment base. We have to think of it as 5 years old. We need to think of it as to how computers were in the 1960s. Think about it as the old IBM mainframes.

Computers are helping the 3D printing industry develop faster. In terms of the consumer reach, when the first ones went up, these were hackers in the show. There are a lot of parallels in the growth curve of 3D printing in the market. I want to see it in a consumer space. GE has a rich history in research. We know it because we have a great friend who is a physicist. The amount of effort and time they put in to their people in the research side of things is why they can take advantage of this and accelerate faster than others.

When you start from scratch or you have to shift an entire business culture that is not used to being a research and design world, it is just not going to happen overnight.

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About Steve Heller

As a senior contract writer for the Motley Fool, Steve Heller began covering the 3-D printing and industrial sectors from the perspective of long-term investing in late 2012. He strives to present complicated investing topics in an approachable way and offer plain-English takeaways that everyone can understand. Steve’s ideal reader seeks to own stocks for at least three to five years. He lives with his wife and black Labrador Retriever rescue in New York City.

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