Pacific Crest: Metal 3D Printing Offers High Growth, But Investing In The Technology Is Challenging

The metal 3D printing systems is expected to increase to a nearly $700 million market by 2016 from $200 million in 2013, according to analysts at Pacific Crest. However, investors shouldn't expect the surge in demand to translate to a guaranteed return on investments.

"As metal printing technology continues to improve, it should become more widely adopted as a complement to traditional manufacturing processes,” Weston Twigg wrote in a note to clients. “However, the market is evolving quickly, and it's difficult to pick the early winners in this crowded market.”

In addition, potential winners in the space are currently trading at high valuations.

As metal printing technology continues to improve, manufacturers will be eager to utilize the technology to complement traditional manufacturing processes. Demand for 3D printed metal parts has been used so far in creating test parts, prototypes and medical or dental implants.

Twigg believes that further improvements in the technology such as speed, materials and quality are forthcoming.

Market overview

Demand for metal 3D printed parts is coming from industrial leaders like General Electric GE who currently uses more than 300 3D printers in its facilities. More than 10 percent of these machines are metal-based industrial systems, according to Twigg.

General Electric is expected to significantly expand its use of the technology to ramp production of fuel nozzles for its LEAP aircraft engine program over the coming years. At its peak, General Electric could manufacturer more than 40,000 fuel nozzles for 2,100 LEAP engines with 3D printers expected to play a key role.

Metal-based 3D printing demand is also becoming more adopted in the automotive, medical and energy industries given the fact that a 3D printer has the ability to reduce material weight, improve material properties, simplify assembly processes, reduce time to market and increase design complexity.

Stock implications

Of the 3D printing companies under the analyst's coverage, 3D Systems DDD and ExOne XONE offer metal printers.

3D Systems is seeing very high demand for its metal printers, and the company could gain near-term market share, according to Twigg. However, the analyst notes “we are growing more skeptical of 3D Systems' ability to successfully manage its wildly diverse businesses.” As such, the analyst believes that investors should wait for an entry point in the low $40s.

ExOne has a unique and differentiated printing technology, but its market success is uncertain, according to Twigg. The analyst adds that the company has not yet demonstrated to investors a consistent history of meeting expectations, and a fair value for shares would be in a range of $23 to $28 until conviction in execution improves.

Stratasys SSYS is “executing well” in the metal 3D printing market. The company has expressed interest in gaining more exposure to the segment, and the company's net cash balance of $578 million could support an “impactful” investment.

If Stratasys were to acquire a metal-based 3D printing systems manufacturer, it would look towards a company with powder bed fusion technology (the most popular and industry-tested technology) with a strong manufacturing base.

Stock ratings

Shares of 3D Systems are Outperform rated with a $56 price target.

Shares of ExOne are Sector Perform rated with no assigned price target.

Shares of Stratasys are Sector Perform rated with no assigned price target.