3D Printing Part 1 – Hype has died, time to invest?

The Gartner hype cycle in the picture above can be used in many situations in life. For example I would draw a very similar curve of my perceived knowledge of equity investing. Starting at a low level back in 2002-2003 as a total beginner. Quickly I reached a peak of disillusion around 2007, when all my investments had done great for 4 straight years. I was master of investing and yearly returns of +30% seemed likely. Like another famous expression, do not mistake a bull market for actual investing skills. In early 2009, all my illusions had been shattered and quite a lot of my bank roll as well. From there onward I have been a more humble investor, knowing how little I actually know about investing. Humbly crawling up thew slope of enlightenment is a fun exercise and what this blog is about. Maybe you have gone through a similar cycle?

But enough about our investment psyches, let’s talk 3D-printing.

3D printing and the hype cycle

As probably most of you are aware, we had a big hype in 3D printing a number of years ago, where do you think we are now on the above Gartner curve?

Let’s look at the share-price performance of two of the largest pure-play 3D printing companies.

It looks like a long term shareholder got a very wild ride above, but most likely no returns so far. And its clearly a boom-and-bust hype cycle we have seen in 3D-printing. But as with every hype, there is usually quite a lot true business opportunities hidden behind all the hype. There are numerous examples of investments that after a hype has died become very profitable. Probably the most famous examples are all after the IT-bubble burst, picking up the survivors like Amazon would have been a good decision. A less famous example would be the extreme hype we had around Clean-tech up until 2008. Since it coincided with the Lehman collapse it’s perhaps slightly less obvious. But winners did emerge here also, like Vestas Wind, which bottomed in 2013 and has from that bottom reached back to around pre crisis all time highs, giving bottom fishers a return of about 17X their money.

To believe that there is something real underlying in a hype, one has to read up on the use cases of 3D printing. And I have to say, the more I read, the more I realize this is actually all around us already and it’s not going to get smaller.

Obviously there is no telling where we are in the cycle, but I would put 3D printing right now somewhere at the earlier part of “slope of enlightenment”. But then thinking about it in more detail, is it really relevant to put everything under one 3D printing label? Probably not, Gartner actually splits up the universe of 3D-printing and maps out all sub-segments onto the curve:

As you can see the graph above is almost 1 year old. So if Gartner is spot-on on all these observations, everything should now be shifted 1 year ahead on the curve. I find the light blue dots especially interesting, since that indicates technology being some 2-5 years from reaching a mature stage. Some of my first question seeing the above graph was, how big is this industry? And are there any examples of a mature 3D printing business? Let’s look at those two questions:

Size of 3D printing industry

For this I’m referring very much to this article: Worldwide Spending on 3D Printing Will Reach $13.8 Billion in 2019

It’s seems to be a very healthy growing industry: “3D printing (including hardware, materials, software, and services) will be $13.8 billion in 2019, an increase of 21.2% over 2018. By 2022, IDC expects worldwide spending to be nearly $22.7 billion with a five-year compound annual growth rate (CAGR) of 19.1%.”

 

Examples of 3D printing businesses

The first and most cited example where 3D printing has taken over the industry completely is hearing aids. According to this article, already in 2017 hearing aids produced in the western world where all literally 3D printed: Phonak 3d printed hearing aid. I find that fascinating, that one large hearing aid player (Sonova) moved to 3D print and within years the whole industry moved to it.

The next example is a tangent to my previous posts about the dental industry. The dental industry has multiple examples of 3D printing or “milling” machines that create custom made products for the mouth. But I think the most telling example is Align Technology, who were able to revolutionize the experience of teeth correction, with it’s invisalign products. Sometimes a video says more than a thousand words:

The third area of 3D printing is not where the technology entirely taken over or redefined it’s product area, but rather high tech production, where 3D printing is a superior technology to save weight, create complex shapes, etc. Again a famous example are the 3D printed parts that started to go into airplanes: Boing Dreamliner with 3D printed parts

Conclusions

So the more I researched and thought about 3D printing, I found 3 broad categories of 3D-printing services/companies:

  1. Creating something unique with a custom fit being the selling point. Most often in someway related to the human body.
  2. Creating a better performing product, by either creating shapes impossible to otherwise produce, with the aim the to increase performance, weight savings, etc.
  3. Software products, machines and 3D printing base material/ingredients.

When talking the 3D printing hype, much of the focus has been on category number 3. But so far, almost all of the actual value creation has been in category 1-2. Align Technology being the shining star example. If you invested in ALGN at 3D Systems share price peak in Aug 2014, you would have returned 460% by now. With that knowledge, probably a good area to search for new investment cases would be in new such 3D printing disruptions and not the 3D printing machine makers themselves. On the other hand, if we are seeing a bottoming of these companies, maybe the also have decent upside from here on. I will be back with at least one investment case in this area in the not too far future.

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Guest post about the US debt cycle

A good friend of mine, who is the one I bounce ideas the most with, asked if it was possible to do a guest post. Without this guest, my discussions and investment ideas over these years would not have been the same. So I’m very happy to present some Macro thoughts from my friend – the first guest poster!

Has the US debt cycle come to an end?

Until this week, the equity market has been holding up fairly well despite the trade war, slowing demand in China and Brexit. But there is something on the horizon that suggests we should sell
equities and wait for a better entry point – the debt cycle in the US seems to have come to an end. A rate cut from the FED during the second half of 2019 would confirm that theory and should be a negative catalyst for equities.

I’m sure many of you have read and heard about Ray Dalio, founder and co-CIO of Bridgewater, one of the largest hedge funds in the world. He describes how the “economic machine works” through the debt cycle. Simply described; both companies and households spending consist of two factors; Income and Credit. Income tends to be fairly stable, growing a few percentage points per year, and is the base of a households´ and companies spending. Credit on the other hand tends to vary over time, perhaps you use credit to buy a new, larger house, or a new car while a company might use it to expand manufacturing capacity. Thus spending can increase faster than income by using credit.

A person’s spending is another person’s income – an important aspect in a debt cycle. This means if you are using credit to consume, another person’s income will increase. With increased income the second person can increase their credit thereby expanding their spending power. This chain of events can continue for years, until the debt cycle stops i.e. when households and companies stop expanding their borrowing. As the cycle turns and less is being spent due to lower credit growth, it means another person’s income is falling. That person will therefore not be able not borrow as much since their income is falling thus decreasing their spending power. The chain of events goes both ways creating the debt cycle. You will find a great summary of Ray Dalio’s theory of How the Economic Machine works here:

I’ve thought a lot about this and tried to quantify the debt cycle with the help of the 3m US treasury yield. We start with the simple assumption that if the demand for credit is high, the price of credit i.e. the interest rate, will rise. When demand for credit slows the interest rate goes down. The reason I’m looking at the 3 month yield is that it says a lot more about the credit demand right now compared to for instance the 10 year yield which factors in a lot of expectations about future inflation and economic growth.

By looking at the y-o-y change in the 3m UST yields we can see how the demand for credit has changed over the last year. This is what we typically do when looking at a company`s specific data, we compare the order book, revenue and EBIT with the same quarter last year to see if it’s gotten better or worse. The chart below tells us that the 3m UST yields are about 50bps higher than a year ago, meaning demand for credit has gone up.

S&P500 vs 3m UST y-o-y (bps)

US Corporate Debt growth y-o-y (%) vs 3m UST y-o-y (bps)

A general thinking when looking at Capital Goods companies is that when the second derivative in organic order growth turns negative it’s usually a good time to sell the stock. It tells us demand is about to stabilize i.e. order growth will go towards 0%. In the same way a positive second derivative, when organic order intake is negative, would be seen as a sign that order growth is about to
improve.

Applying the same methodology on the 3m UST yields a negative second derivative would tell us that the demand for credit is slowing, a strong indicator the debt cycle is coming to an end. The y-o-y change in the 3m UST started to stabilize by mid 2018 and has recently started to go down as a result of the lack of rate hikes from the FED. The Fed Funds futures market indicates we will have at least one cut from the FED during the second half of 2019 and another one in 2020. A cut in interest rates from the FED in the second half of 2019 would confirm the end of the debt cycle which would mean the start of a bear market.

FED FUNDS Future Aug19-Dec19

S&P500 vs 3m UST y-o-y (bps) including a rate cut in October

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