- 3D printing industry is reminiscent of earlier Black Swan breakthrough technologies.
- Black Swan breakthrough technologies typically produce stock market bubbles as investors overestimate short-term implications.
- 3D printing stocks are exciting speculations, but sky-high valuations can make for poor long-term investments.
Investors often substitute the question “Is this an attractive investment?” with the question “Is this an attractive company?”
3D Systems (NYSE:DDD) touched a new 52-week low of $33.80 Friday before closing at $34.47. This continues the stock’s collapse from its 52-week high of $97.28.
The company has a market cap of close to $4 billion and sales of only $500 million. Despite the crash in its share price over the past 12 months, DDD still trades for around 100X earnings. Is this pullback a good entry point to invest in the 3D printing industry, or will there likely be an even better opportunity in the future?
Consider this article a warning from history.
I have been fascinated by the nature of stock market bubbles and busts for quite some time now. I believe markets largely (though by no means perfectly) tend towards efficiency and rationality, but that every now and then unpredictable shocks strike the system, producing consequences for the economy, which are exceedingly difficult to predict both prior to the arrival of the shock as well as at the time the shock is unfolding. These shocks can be both positive and negative and can disrupt the economy as well as the financial system, producing what legendary investor, George Soros, has called far from equilibrium situations.
Introducing the positive Black Swan
These destabilizing and unpredictable shocks which create “far from equilibrium situations” are referred to by Nassim Taleb as Black Swan events. Black Swan events have three characteristics: they are extremely rare, extremely impactful and highly unpredictable. Most people discuss negative Black Swans, leading to financial market upheaval and economic as well as political havoc, but far fewer discuss what happens when positive Black Swans rear their heads.
Great stock market bubbles typically involve a Black Swan technological breakthrough, which has broad implications spanning across many different industries. The new technology is always incredibly important, and because it was unexpected and market participants have no clear way of fully understanding the potential implications for the breakthrough technology, it leaves the doors wide open for speculation.
In a Seeking Alpha article from May of this year, I detailed three such Black Swan technological breakthroughs – the electricity, electronics and Internet booms. Please refer to that article for background. In this article, I consider a fourth …
The 3D printing Black Swan technological breakthrough
The 3D printing industry carries all the potential markers for a positive Black Swan shakeup. It’s a revolutionary technology still in its infancy. The future applications for 3D printing are still highly uncertain and varied. The trajectory this technology will follow is unpredictable. That being said, 3D printing is a rare breakthrough in the sense that, like electricity, electronics, or the Internet, it has the potential to reorganize the entire economy.
It does not take a fantastic imagination to see how 3D printers – as costs come down and the technology rapidly improves – could reshape how manufacturing is done in the West. In the early days of computing, a computer cost millions of dollars and took up multiple rooms of storage. Not too long after, this technology was available for a few hundred bucks and could fit inside someone’s pocket. If 3D printing follows a similar path (in terms of scope and speed of improvement) it could also completely transform home life. Imagine printing keys, locks, nails, door handles, cutlery, dishes, instruments etc.
It is often said that once a new technology begins to really take off people almost always overestimate its short-term impact and underestimate its long-term impact. This could explain why price-to-earnings ratios skyrocket to 100X+ (as investors overestimate the short-term) and then plummet (as investors underestimate the long-term). In the short-term, people know the industry will be revolutionary, but they overestimate how the stock will fundamentally perform in the near future.
The redeemer here is that 3D printing has not yet reached the masses in the sense that only early adopters currently own them. Perhaps when they become more accessible to the average person we will see the real boom in 3D printing stocks. But remember the lessons of history. Just because eToys.com went from $4 billion to $8 billion in the market (before completely collapsing) does not mean that eToys.com was ever actually worth $4 billion in the first place. Purchasing it at $4 billion would have worked out wonderfully as a short-term speculative gain, but terribly as a long-term investment holding.
Innovation, competition and consolidation: Do you want to buy a lottery ticket, or a sound investment?
The technology is still in its early infancy. 3D printers are going to change dramatically over the next several years as the technology is refined and improved. The big guys currently in the space are extremely likely to be displaced over the medium- to long-term. And, given sky-high valuations, reminiscent of dot-com stocks even with recent share price collapses, it’s not a given any of the larger players will be acquired at current prices.
Indeed a large player is already getting involved – Hewlett-Packard (NYSE:HPQ). HP intends to be a leader in 3D printing and is making substantial investments to bring a next generation 3D printer to market by 2016. Hewlett Packard’s leadership has also explicitly stated that they wish to avoid large acquisitions in this space (likely due to the extended valuations as mentioned).
Who’s to say whether or not Hewlett Packard will be successful? They have a competitive edge in the printer business and considerable resources, but haven’t demonstrated themselves to be very innovative over the last several years. The key point here is that this is the start of larger tech companies entering the 3D printing space.
There will come a time of incredible competition in 3D printing after the technology and profits start to accelerate and draw more tech firms into the space. Consolidation and destruction of the less capable and innovative firms will continue until clear industry leaders emerge. Until that point in time, it is nearly impossible to pick who the long-term winner of 3D printing will be. The industry is currently subject to speculative gambling. Automobiles revolutionized transportation, but that didn’t stop hundreds of car manufacturers from going bust.
Do you want to buy a lottery ticket, or a sound investment?
In sum, due to the clearly exciting implications and potential of 3D printing, I believe many investors are falling prey to the cognitive bias of substituting the question of “Is this an attractive investment?” with the question “Is this an attractive industry?”.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a qualified financial professional. The opinions expressed in the article and comments section are not investment advice. Please do your own research and follow your own due diligence practices and contact a financial adviser before making any investment decisions.