Although I was only 18 at the time, only having mildly played around in the stock market, and more worried about getting accepted to a decent college than what the market was doing each day, I do have some recollection of the Dot-com Bubble, also known as the Internet Stock Bubble. More so than its actual bursting I recall the euphoria of the media and investment community leading up to the peak of the market in March of 2000. The majority of investors thought that the internet would change the very fabric of business analysis, as trillions of dollars in new opportunities would sprout up over the coming years. While they were right about the enormous impact that the internet and the companies making it up would eventually have, they were wrong about the business fundamentals behind it all. While companies spent recklessly to ensure future profits, they failed to realize just how important a sound business plan was.
Companies like Boo.com, which blew through $188 million in just 6 months in an attempt to create a global internet fashion outlet, failed within months. Companies such as Lycos.com and Broadcast.com sold for billions of dollars only to either go belly-up or fade away into the oblivion of internet startups. There were trillions of dollars lost (in fact $1.755 trillion in market value), but ultimately the industry emerged stronger than ever, years later. While the 3D printing space has seen a similar bursting of the bubble a decade and a half later, there are also major differences between the two situations. Below we will discuss some of these similarities and differences.
A phrase coined by the Federal Reserve chairman at the time, Alan Greenspan, who said that investors were irrationally positive or optimistic of the situation, has since entered the vocabulary of most stock analysts. Investors believed that the internet would change everything within a short period of time. Instead of using traditional models for evaluating a company and their future earnings, they created their own models based on irrational growth projections. By the time investors finally realized that PE ratios of 400, or companies with no solid models to generate revenue were valued in the tens or even hundreds of billions of dollars, it was too late for many.
While the impact on the market that the 3D printing bubble has had is meager at best, we did see some minor ‘Irrational Exuberance’ in the space in late 2013 and early 2014 when the majority of the stocks such as 3D Systems (DDD), Stratasys (SSYS), Organovo (ONVO), Voxeljet (VJET) and ExOne (XONE) peaked or were close to their peaks. Comments such as “3D printing will change everything,” and “Everything will be 3D printed eventually” were commonly heard, and in some respects still are. Investors became irrationally excited about a very exciting technology, a little bit too quickly. Once again, companies that were losing money, or were barely profitable, were traded with market caps in the billions, while the direction that the market would go still remained unclear. In the ensuing months we saw stocks drop as much as 90% from their highs, as fear came into play.
After the market collapsed in 2000 and continued to drop through most of 2002, valuations of most internet companies seemed more on par with historic averages. Stocks were probably trading at a fair value, or maybe a smidgen below as investors put up their guards. It’s difficult to say how future investors will judge the 3D printing bubble’s bursting, but I believe this time around, investors may have oversold their shares. Perhaps it’s the fear that we are in fact following in the footsteps of the Dot-com bust, or perhaps, an increase in short sellers has compounded the selloff, but right now, many of the larger players within the industry seem to be trading at prices which may be undervalued. Ultimately we will have to wait a few years to see just how rational the market is currently behaving, but in my opinion we may now be witnessing a case of ‘Irrational Depression.’
Profitable Business Models
While the the Dot-com bust was all about companies soaring to enormous values without a clear revenue or profit model, this is not the case within the 3D printing space. In fact most companies have several revenue generating models in place, as this industry is primarily about hardware and paid services. Many of the Dot-com companies at the turn of the millennium concentrated on building up their member bases and traffic at all costs, regardless if they knew how to monetize that traffic over the long haul. When investors began questioning how the companies they owned stock in would actually produce positive cash flow, the crash began.
The vast majority of companies within the 3D printing space are already cash-flow positive, or close to it, and as the market expands so too will their top and bottom lines. Certainly PE ratios got quite a bit higher than they likely should have been, but the models for successful revenue generation are in place, while a clear path to future profits can easily be noticed.
One of the few things I do remember from the Dot-com bust is a conversation I happened to overhear between two of my friend’s relatives, in which a man and a woman were discussing the market and their respective investments. The conversation went something like this:
“Everything in Webvan!” the man said.
“Whats that?” the woman questioned.
“It’s an internet company. Gonna be big,” the man responded.
“Awesome, let me know the ticker symbol,” the woman said excitedly.
I ended up going home that afternoon and looking Webvan up. It was basically a company that allowed individuals to order their groceries online. The stock was trading at close to $30 at the time, with a market cap of $1.2 billion. Within a year the stock plummeted over 99.8% to trade at just $0.06 a share, with a market cap of only $2.4 million, and even today, 15 years later, online grocery purchases are meager at best. The point is that investors were dumb. They invested into companies solely because they were ‘internet companies,’ ignoring everything else.
I don’t believe this is the case with 3D printing stocks. Investors, at least the ones I have spoke to, seem to have a firm grasp on the technology as a whole, or at least they understand somewhat how the companies make money, and what the future of the industry may or may not hold. While irrational exuberance may have set in somewhat, at least the exuberance is based on more than just air.
The next 2-3 years will be telling for the industry as larger corporations enter and new startups continue to garner seed capital. Much of the drop in the 3D printing space today has to do with fear of large competition such as HP, and less with fear that the market will not materialize.
Are you an investor in any 3D printing stocks? Let’s hear your thoughts on the recent price action within the space. Discuss in the 3D Printing Stocks forum thread on 3DPB.com.