There's no guarantee that 3D printing stocks, which had a painful year in 2014, will soar again. However, if you believe, as I do, that the industry's torrid projected growth dynamics -- industry expert Wohlers Associates expects it to grow at an average annual rate of more than 31% through 2020 -- -- make it likely that there will be at least one winner among the current players, how do you decide which company to invest in?
A good strategy for investing in 3D printing stocks is to buy more than one. That's because it's very difficult to know which existing company in any fast-growing technology space will emerge a winner -- or even still be standing -- in the future. Instead, simply divvy up what you'd usually invest in a single stock.
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Three stocks would probably be a good number. However, there are just two stocks among the "pure plays" (companies that derive all their revenue from 3D printing) that I have a good amount of confidence in at this time. So I'm not going to choose a third simply for the sake of diversification.
The pure-play 3D printing stocks
There are six pure-play 3D printing stocks that trade on U.S. stock exchanges:
Data source: Yahoo! Finance; data as of Jan. 23.
Best 3D printing stocks: Stratasys and Arcam
I continue to believe that Stratasys is the best larger, diversified stock, and Arcam is tops among the smaller players.
Stratasys: The best large, diversified 3D printing companyStratasys and 3D Systems were co-first-movers and are by far the largest and the most diversified among the 3D printing companies. Oftentimes, first movers in an industry have a sustainable competitive advantage. Both companies have their proponents and strong points, though I continue to favor Stratasys.
Objet500 Connex3 multi-material 3D printer. Source: Stratasys.
Stratasys executed much better than did its prime competitor in the first three quarters of 2014. (Q4 results aren't out yet.) In my opinion, this is largely due to its more focused and less acquisitive approach to growth. Stratasys focuses its efforts on three distinct 3D printing technologies, whereas 3D Systems has seven. Before last year, when both companies ramped up their growth games, Stratasys had only made one notable large acquisition (MakerBot, 2013); it was also involved in one merger (Objet, 2012). Objet and MakerBot were both considered best-in-class when Stratasys came a-courting. Meanwhile, 3D Systems has gobbled up more than 50 mostly smaller companies in the past three or four years.
Growth-via-acquisitions strategies can be tricky to pull off well over the long term. It's nearly impossible for a company's top management to be involved in constant acquisitions without sacrificing some attention to nurturing existing businesses. Additionally, the greater the number of acquisitions, the greater the potential for lack of synergy with existing businesses and conflicts among corporate cultures.
Organic revenue growth (revenue growth in businesses that have been owned for at least one year) is a key metric to monitor for companies that are growing at least partially by acquisitions. Robust organic growth is also often reflective of a successful research and development program, which means a company isn't just relying on constant new acquisitions for growth.
Stratasys' organic revenue growth was 33%, 35%, and 35%, respectively, in the first three quarters of 2014. Meanwhile, 3D Systems organic growth was 28%, 10%, and 12% in those same quarters. While there seemed to be good reasons for 3D Systems' slow organic growth in the second and third quarters, the fact remains that there were execution issues.
Stratasys has also been performing better on most other fronts, too, including overall revenue growth and year-over-year changes in earnings. Its valuation, when combined with its projected five-year growth, is also somewhat more compelling.
This isn't to say that 3D Systems doesn't have its strengths. One strong point, for instance, is that the company has sold out of metal 3D printers in every quarter since it acquired Phenix Systems in the summer of 2013.
Arcam's Q20, released a year ago, for series production of aerospace parts. Source: Arcam.
Arcam: Electron-beam-focused onthe industrial metals nicheArcam makes printers that use its proprietary electron beam melting, or EBM, technology, to produce metal components. The Sweden-based company targets customers in the medical implant and aerospace industries.
Since Arcam's tech is patent-protected, any entity that wants a new 3D printer that uses EBM technology has to buy it from Arcam.
Unlike fellow smaller companies ExOne and voxeljet, Arcam is currently profitable. Overall, the company executed well in 2014, particularly in the third quarter. Based on Arcam's strong order backlog at the end of Q3 and the number of orders received in Q4, its Q4 results should be robust. And if they're not, then Q1 2015 results should be strong.
Be aware that Arcam is averythinly traded stock, which means it can be especially volatile. The company's stock is listed on the Nasdaq OMX Sweden, not a major U.S. stock exchange. However, investors can buy the stock over the counter in the United States. An additional risk factor is that Arcam has only one technology. If EBM falls out of favor with one or both of Arcam's target markets, the company doesn't have any other technologies to fall back on.
At this point, Stratasys and Arcam remain my two favorites among the pure-play 3D printing stocks. They executed the best in 2014, and there's no reason to believe that their positive momentum won't continue in 2015 and beyond.
The article The 2 Best 3D Printing Stocks for 2015 originally appeared on Fool.com.
Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 3D Systems, Apple, ExOne, Proto Labs, 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.
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