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Dump 3D Systems and Buy Organovo

May 09, 2014 | About:
FinanceGuru

FinanceGuru

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The hype surrounding the 3D printing industry is huge, with many analysts claiming that this technology will grow into the next-generation technology for industrial manufacturing and production. I, for one, don't believe that this hype is justified and I remain highly skeptical of 3D printing's future.

There are numerous companies that are involved in this industry, which makes growth for any single company even more difficult. In addition, the arrival of new companies like Voxeljet will intensify competition further. 3D Systems (DDD), due to its diversified product portfolio and wide distribution network, is often projected to become the leader of this industry.

However, I don't see it happening because of a few reasons. So, let's analyze these reasons and find out why 3D Systems and other companies like Stratasys may not develop into the next-generation leaders of industrial manufacturing.

3 Risks to the 3D industry

1. Time consumption and efficiency

3D printing consumes a large amount of time for printing a product. The process of 3D printing can last from a few hours to a few days. Hence, 3D printing does not stand a chance against industrial machines that can produce thousands of products every hour. In addition to that, industrial machines produce fully finished products that can be directly loaded onto a truck, while the 3D printing process lacks this feature. The 3D printing procedure would require an extra step of removing the printed product from the printer, and casing it before it can be shipped. This, evidently, will increase the lead time and capital consumption.

The time consumption can be reduced considerably by stacking multiple printers together, but it will be unpractical primarily because of a few reasons like:

  • 3-D printers are expensive; therefore buying multiple printers will not be feasible.
  • High space and power requirements.
  • Individually providing all the printers with the raw materials and collecting the finished product from each of the printers and then assembling it will consume a lot of time.

To match the production rate of an industrial machine, a company will have to deploy hundreds and thousands of 3D printers, which as I said, is not feasible.

2. Strength and material

The strength of the finished product is another issue which comes with this technology. Since this technology uses layering techniques, the printed product will not be as strong as the conventionally manufactured product.

Also, a 3D printer usually prints in plastic; therefore it will not find its use everywhere. Most of the things we use today are made from a blend of different materials, so this will restrict the utilization of a 3D printer.

3. Extremely high cost

A 3D printer is very expensive and on top of that, the material used in printing is not cheap. A traditional industrial manufacturing machine may cost more than a 3D printer, but these machines make up for it by producing finished products at a much higher rate than the 3D printer.

These are the few reasons why I believe that a company like 3D Systems might not be able to live up to its present hype. Moreover, 3D Systems has been surviving on the back of acquisitions. The company has made a whopping 38 acquisitions since 2011. This means that 3D Systems has been acquiring most of its technology instead of developing it. Of course, bulls might point toward certain moves such as the company's recent product launches. 3D Systems recently made its affordable Cube 3D printers available at Staples as it looks to reach a wider customer base. In addition, it made another acquisition in the form of The Sugar Lab, a California-based start-up micro-design firm engaged in the 3D printing of real sugar.

But then, 3D Systems is not a good value and given the challenges expected in the 3D printing industry, I think it is best avoided right now. 3D Systems' P/E ratio of more than 70 is something that would put value investors off and if the company's growth rate slows down, it would see a major sell-off as a short float of 33% suggests.

Still a Company Worth Looking At

A less talked-about 3D printing company which, in my view, has a bright future is Organovo Holdings (ONVO). Unlike the other 3D printing companies, Organovo works on the development of 3D bio-printing technology. The technology, which prints out functional human tissues on demand, may sound futuristic, but it's not too far-fetched as Organovo has been able to do it. The company aims to improve upon this technology and produce actual body parts in the future.

As of now, the company can produce live human tissues that can replicate the native human biology, making the process of researching new medicines much quicker. In 2010, pharmaceutical companies invested almost $50 billion in research and development of new medicines and treatments, but the FDA approved only 20 new medicines.

On an average, a new medicine takes 12 years of research and $1.2 billion worth of investment to bring to market; therefore this technology will enable the pharmaceutical companies to eliminate potential drugs and save money.

Even though Organovo is in its early stages of development, major players like Pfizer have already started to test it out. Organovo's agreement with Pfizer expired just before the end of 2012, and Organovo has been waiting to hear back from Pfizer to see if the company wants to continue using Organovo's products. Also, last month, Organovo announced that it has penned an agreement with Roche. Roche would be using Organovo's innovation for exploring the use of 3D liver tissue in toxicology.

Also, Scientia Advisors has estimated that it sees a market opportunity worth more than $500 million for Organovo by 2018. As of now, the company has been successful in its attempt to develop functional liver tissues and it aims to broaden its portfolio to heart and kidney cells. For a company that presently has almost no revenue, this is a pretty big opportunity.

Organovo has embarked upon a completely different approach to 3D printing, which will give it a competitive edge over other 3D printing industry players. Also, since the company doesn't have to compete against any kind of industrial manufacturing machines, time and money parameters are not an issue.

It is difficult to value Organovo at present since it is a developmental stage company. Its revenue over the trailing 12 months is just $1.14 million, so conventional valuation metrics such as the P/E ratio or the PEG ratio won't be of much help. However, the market opportunity is huge for Organovo as we saw above and in my view, investors would be better off spending more time researching about it rather than 3D Systems.

A Potential Threat?

On the other hand, Organovo seems to be without any strong competitors. For instance, Yahoo! Finance lists no competitor. However, researchers at a Chinese university recently managed to successfully print human liver cells, with 90% of the cells coming out of the printer alive. But since it is not a big corporation, and given the fact that Organovo already has tie-ups with big pharma companies, it doesn't face much of a threat from the Chinese university at present.

Conclusion

3D Systems, no doubt, is a pioneer in the 3D printing industry. But given its steep valuation and potential challenges as mentioned above, I think that it is better to look at a company like Organovo that's focusing on something groundbreaking. The exact time frame when Organovo will become a good investment is something which cannot be stated explicitly, but as long-term investors, one should be ready to hold for a longer period of time. As Warren Buffett (Trades, Portfolio) says, "Our favorite holding period is forever."

Hence, investors will need to be patient if they are investing in Organovo, as the company is in its nascent stage. If Organovo is able to achieve what it has set out to do, then it would probably turn out to be a good investment in the future.


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Comments

hansen.harlley
Hansen.harlley - 4 months ago

3D Systems currently is trading at a premium of around 38% in terms of the forward one-year P/E multiple http://bit.ly/1oeXYtE

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