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By Ahmed Ishtiaq

3D Systems Corporation (NYSE:DDD) has shown remarkable growth over the past year. However, the stock price has gone up even faster than the EPS and revenue growth. At the moment, the market for 3D printing is growing rapidly and 3D Systems have the advantage of being an early mover. 3D Systems' stock is currently trading at incredibly high multiples, which makes one wonder whether it is wise to invest or not. As a result, we decided to perform a simple valuation based on different revenue growth assumptions. Let's look at the model.

Model Assumptions:

3D systems have recorded incredible growth in its revenues over the past two years. On average, the revenue has grown at 40% during the previous two years. We have assumed revenue growth of 15%-40% over the next four years, and 5% constant growth rate afterwards. However, we believe that a revenue growth of 25% will be appropriate for the company. As a result, we will only discuss in detail the model with 25% assumed growth in revenue. However, we will also list the prices from other models with different revenue growth estimates.

As the scale of operations is increasing for the company, the cost of sales is coming down. At the end of 2010, the company had cost of sales at 54% of its total revenues. However, by the end of current year, the cost of sales will be less than 45% of the total revenues. We have assumed a declining cost of sales, 43% of total revenues in 2013 which will come down to 40% by 2017. In addition, we have assumed a growth rate of 10% per year in total operating expenses and a tax rate of 17%.

ProForma Earnings (Based on 25% assumed revenue growth):

Reported Earnings

Projected Earnings

2010

2011

2012

2013

2014

2015

2016

2017

Revenue:

Products

$113,117

$137,306

$222,589

$278,236

$347,795

$434,744

$543,430

$570,602

Services

$46,751

$93,117

$118,569

$148,211

$185,264

$231,580

$289,475

$303,949

Total Revenue

$159,868

$230,423

$341,158

$426,448

$533,059

$666,324

$832,905

$874,551

Cost of Sales:

Products

$56,041

$66,589

$89,653

$111,295

$139,118

$173,898

$217,372

$228,241

Services

$29,851

$54,806

$63,589

$74,106

$83,369

$97,264

$115,790

$121,580

Total Cost of Sales

$85,892

$121,395

$153,242

$185,400

$222,487

$271,161

$333,162

$349,820

Gross Profit

$73,976

$109,028

$187,916

$241,047

$310,572

$395,163

$499,743

$524,730

Total Operating Expenses

$53,056

$74,126

$114,256

$125,682

$138,250

$152,075

$162,720

$174,110

Income from Operations

$20,920

$34,902

$73,660

$115,366

$172,323

$243,088

$337,023

$350,620

Interest and other expenses, net

$1,181

$2,456

$10,256

$10,562

$10,256

$9,562

$10,693

$11,569

Income before income taxes

$19,739

$32,446

$63,404

$104,804

$162,067

$233,526

$326,330

$339,051

Provision for (benefit of) Income taxes

$173

-$2,974

$10,779

$16,769

$25,931

$35,029

$48,950

$50,858

Net Income

$19,566

$35,420

$52,625

$88,035

$136,136

$198,497

$277,381

$288,193

EPS

$0.42

$0.71

$0.74

$1.66

$2.57

$3.75

$5.25

$5.45

According to our estimates, the company should be able to report earnings of over $5 per share by the end of 2016. Furthermore, we expect 3D systems to have solid margins.

Valuation:

For the valuation purposes, we have assumed a discount rate of 10%. 3D Systems have a strong history of revenue growth and a solid business model. Taking into account the strong position of the company, we believe a discount rate of 10% is justified.

Valuation

2012

2013

2014

2015

2016

2017

Earnings

$0.74

$1.66

$2.57

$3.75

$5.25

$5.45

Discount rate

10.00%

10.00%

10.00%

10.00%

10.00%

10.00%

Present Value Factors

0.99

0.91

0.83

0.75

0.68

0.62

Discounted Earnings

$0.73

$1.51

$2.13

$2.82

$3.58

$3.38

Terminal year Value @5% constant growth

$57.17

Discounted Terminal Value

$35.50

True Value

$49.66

There are two conventional methods to calculate the terminal year value; multiple of terminal year earnings and a constant growth model. We have used the latter, and assumed a 5% constant growth rate after the high growth period of four years. We believe 3D Systems will be able to generate impressive growth figures after the hyper growth period. Furthermore, the terminal year earnings of $5.45 are discounted using the single stage growth model, where the earnings are first adjusted for constant growth and then discounted by the discount rate of 10%. The single stage growth model also adjusts discount rate for growth by deducting the terminal growth rate from the discount rate. Once the terminal year value is calculated; it is then discounted to reach at the present value. On the other hand, earnings before the terminal year are simply discounted to reach at the present value. Finally, the discounted earnings are added to the discounted terminal value to reach at the true value/fair value of the stock. According to our valuation model, 3D Systems should trade around $50. The stock is currently trading at a discount to its fair value.

Expected Prices under Different Revenue Growth Assumptions:

We calculated different prices for 3D Systems with the help of our model. We have tried to present a range of possible scenarios through these assumptions. The lowest level of assumed revenue growth is 15% while the highest is 40% per year. The table lists the prices under different revenue growth rates; however, we have kept the discount rate at 10% for all the scenarios.

Earnings

2012

2013

2014

2015

2016

2017

Fair Value

15% growth rate

$0.74

$1.36

$1.82

$2.35

$2.97

$3.06

$29.06

20% growth rate

$0.74

$1.51

$2.19

$3.02

$4.03

$4.18

$38.75

25% growth rate

$0.74

$1.66

$2.57

$3.75

$5.25

$5.45

$49.66

30% growth rate

$0.74

$1.82

$2.98

$4.55

$6.61

$6.88

$61.89

35% growth rate

$0.74

$1.97

$3.40

$5.40

$8.14

$8.49

$75.54

40% growth rate

$0.74

$2.12

$3.83

$6.33

$9.85

$10.29

$90.73

Revenue growth anywhere under 21% in the coming years will mean that the stock is currently overvalued. Based on 15% assumed growth, the stock should be trading at around $30. However, if the company is able to maintain the current revenue growth for the next four years; the stock price can also go over $100. We believe the revenue growth will be somewhere between these two extremes. As a result, we have focused on 25% revenue growth.

Summary:

3D printing is growing at an exceptional pace, and there is a lot of potential in the market. It is possible for 3D Systems to grow at remarkably high growth rates due to limited competition. At the moment, there is only one established competitor in the form of Stratasys (NASDAQ:SSYS) for 3D systems. We believe if 3D systems can maintain revenue growth above 25% in the next four years, it will prove to be a solid investment.

Source: How Much Is 3D Systems Worth?