Image source: 3D Systems.
Continue Reading Below
Since the start of 2015, customer demand for 3D printers has slowed notably across the industry and weighed on 3D Systems' (NYSE: DDD) performance. Rival Stratasys believes the slowdown was created by an oversupply of 3D printing capacity in the hands of customers, prompting them to increase their utilization instead of buying additional printers.
Last week, 3D Systems' second-quarter earnings call shed more light on the issue. Essentially, the prototyping market appears to be far more saturated and slower growing than production (i.e., manufacturing) applications. And that's exactly why 3D Systems will be emphasizing its production portfolio more going forward.
During 3D Systems' second-quarter earnings call, CEO Vyomesh Joshi highlighted that growth in the prototyping market "is going to be difficult" going forward, likely because the value proposition around using 3D printing for prototyping purposes is well known in the marketplace.
After all, 3D printing has been around as a prototyping technology for about 30 years -- plenty of time to convey that 3D printing requires no tooling, which saves users time and money developing new products. The likelihood of a user who prototypes, but isn't aware of these benefits today, is extremely low. Additionally, from a competitive perspective, the number of 3D printers that cater to prototyping applications is greater than the number of 3D printers that can handle manufacturing applications.
Continue Reading Below
Crossing the chasm
Even though 3D printing has existed since the 1980s, the idea of using 3D printing for direct manufacturing applications is relatively new -- and growing fast. According to Wohlers Report 2014, a 3D printing insights report, revenue from the production of 3D-printed parts for final products has risen from 4% of overall industry revenue in 2003 to more than one-third of industry revenue in 2013. Between 2012 and 2013, this segment grew by an estimated 65.4% to nearly $1.1 billion. For perspective, the entire 3D printing industry grew by 34.9% between 2012 and 2013.
With General Electric planning to 3D print more than 100,000 aviation parts a year by 2020, including the fuel nozzle for its upcoming Leap jet engine, this figure is widely expected to rise, because it'll likely validate the technology for other mission-critical manufacturing uses.
GE plans to 3D print more than 40,000 of these fuel nozzles per year. Image source: GE.
From handfuls to boatloads
The opportunity surrounding 3D printing for direct manufacturing far exceeds the market opportunity surrounding prototyping applications. That's because the ratio of prototypes to finished parts often exceeds 1:1,000. After all, a designer usually only makes a handful of prototypes compared to the thousands -- and sometimes millions -- of final parts produced.
With orders of magnitude difference in volume between prototyping and manufacturing, there's far more at stake for 3D printing companies to cater to direct manufacturing.
Another way to look at this opportunity is from the perspective of utilization. 3D Systems operates a razor-and-blades model where 3D printer usage fuels the recurring sales of materials, which tend to command higher profit margins. Essentially, 3D System's focus on manufacturing is likely to drive higher utilization rates than prototyping, which in turn, fuels more frequent recurring sales of materials. And this, in turn, increases the lifetime value of 3D Systems' customer base.
According to Joshi, 3D Systems offers three technologies that can be used for direct manufacturing -- direct metal printing, selective laser sintering, and stereolithography -- which the company will continue investing in.
Although the practices surrounding 3D printing for direct manufacturing are less established and the competition in the space isn't as fierce as prototyping, investors shouldn't perceive this as an open-ended opportunity that's 3D Systems' for the taking. The reality is that transitioning 3D printing to becoming a viable and widely used manufacturing technology is going to require 3D Systems to take a more consultative approach with its customers, which likely entails developing manufacturing workflow solutions on a case-by-case basis. Frankly, it's likely going to take years for this to play out.
However, when the industry is ready to fully embrace 3D printing as a "factory in a box," 3D Systems will be waiting with a competitive set of offerings.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
Steve Heller owns shares of 3D Systems. The Motley Fool owns shares of General Electric. The Motley Fool recommends 3D Systems and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.