Could HP Make Trouble For Other 3D Printing Stocks?

Chris Lau, Kapitall: HP CEO Meg Whitman is set on getting into 3D printing. What does this mean for rival 3D printing stocks​?

In addition to strong quarterly earnings and a bright outlook, there may be one more reason for 3D printing companies to be wary of  Hewlett-Packard (HPQ). CEO Meg Whitman said it plans to enter the 3D printing market organically.

[Read more on Kapitall: Could 3D Printing Actually Take Down Major Retailers Like Wal-Mart?]

For investors, HP’s move into 3D printing could be very good for potential upside. HP is not planning to make expensive acquisitions, and will leverage what it already knows in the printing business to grow the department from within. 

Strong starting point

Investors reacted positively to a quarterly earnings report that saw HP gain market share in the printing and PC markets. In the fourth quarter, HP generated $2 billion in free cash flow, while net income was $1.4 billion. The company ended the quarter with no net debt. HP earned $1.01 per share on revenue of $29.1 billion. 

Click on the interactive chart to view data over time. 

Entering 3D printing

On the conference call, Meg Whitman said HP would enter 3D printing but will do so by finding its value proposition by market segment:

"So we intend to play in the 3D printing market … It’s obviously different than paper printing but some of the technology is the same … we anticipate … entering this organically. And what we’re doing is focusing on what’s the value proposition by market segment, whether that be consumer or industrial. What’s the competitive differentiation and we’ve got some very interesting things coming."

The efforts will likely not bear fruit until sometime in 2014 or 2015. With HP shares valued at a forward P/E of 7, the company is deeply discounted compared to other 3D printing stocks like  3D Systems (DDD) or Stratasys (SSYS) . Stratasys trades at a forward P/E of over 70:

Click on the interactive chart to view data over time. 

For now, printing profits of $1.1 billion account for 17.7% of HP’s total revenue. In Q4, shipments grew 6% thanks to good results from Ink in the Office. When 3D printing is finally introduced, it will be a smart part of sales, but if HP finds ways to leverage from its existing printing unit, growth could increase rapidly.

Conclusion

HP's goal to enter 3D printing without making an acquisition will please conservative investors. Past acquisitions for the sake of growth proved costly.

The company's acquisition of Autonomy is an example of an expensive purchase, but 3PAR is finally showing good results. 3PAR grew 64% year-over year. Many 3D printing companies are already too large to be considered for acquisition. 3D Systems has a market cap of $7.7 billion, while Stratsys has a market cap of $4.94 billion. 

The balance sheet for HP is improving, and will give the company more room in future spending. Debt dropped by over $5.5 billion this fiscal year. As HP reduces its debt burden in the quarters ahead, the company may be in a better position to boost R&D spending for 3D printing development. 

 

(Written by Chris Lau, a Kapitall Contributor. All data sourced from Zacks Invesment Research.)

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