Yesterday, 3D printing company Stratasys warned of lower than expected first quarter results. Today, after a slew of downgrades the stock is down well over 20% as of pixel time. All told, the 3D printing industry has suffered a meltdown, with Stratasys and it’s publicly traded competitor 3D Systems posting ~50% and ~40% declines over the last year, respectively.
As often happens with new markets, the initial entrants tend to reap fat profits. This acts as a powerful signal to the market: the prospect of amassing similar fortunes attracts entrepreneurs and investors to the sector. Competing products eventually proliferate.
Kickstarter has proven to be a popular platform for showcasing new 3D printing technology. In the plot below, we indexed new project launches in the 3D printing category and then counted the number of new product launches per month. This month set a record, with 37 new project launches in April alone:
These new entrants erode the profit margins of the incumbent firms: consumers have access to a wider range of choices as competition increases. The transformation doesn’t happen overnight, but information spreads with each new successful entrant to the market. One of the main vectors for information transmission is the internet; thus, looking at proxies like Kickstarter or Google Trends can be informative to making sound decisions.
For example, readers of our book saw how search volume for 3D Systems and Stratasys was cointegrated with their stock prices. Search volume for Stratasys and it’s competitor have waned as of late, reflecting the effect of increased competition in the additive manufacturing industry. More troubling to the sector, search volume for the term “3d printing” has declined consistently since the start of the year.
This kind of mismatch, shrinking demand and expanding supply, is poison for profits. We expect increased competitive pressure will continue to compress margins in the sector over the short- to medium-term horizons. Qualitatively, like most investors in the space, we believe in the near limitless potential of the industry over the long-term, especially as it relates to the delivery of consumer goods. However, our data suggests that the current shakeout period might last for some time.
Additionally, catching the next wave could be difficult: future emerging champions are more likely to use unconventional fundraising efforts than list on a public stock market. That is how they will cash out. Staying abreast of current trends in the market means employing tools considered just as unconventional to average investors and traders.
Want to learn how to mine social data sources like Google Trends, StockTwits, Twitter, and Estimize? Make sure to download our new book Intro to Social Data for Traders by our very own Thomas Pendergrass