By: Ahmed Ishtiaq
3D systems (NYSE:DDD) was one of the best performing stocks of 2012, recording an astonishing gain of over 250% during the past year. Over the past twelve months, we did not just see a climb in the stock price. We also witnessed a change in the analyst estimates about the stock. A majority of analysts revised their estimates upward for 3D systems. There have been a lot of questions about the ability of the company to continue its growth. Some sections of investors are pessimistic about the future growth prospects and current valuation of the stock.
I have a completely different opinion about the company. Pessimists were also raising questions about the valuation of the stock when it was trading at $41. I recommended the stock in my article on November 20, 2012. Since then, 3D systems have gained about 30% and returned handsomely to investors. I believe there is a lot of potential in the market, and the market is far from saturation. In my opinion, current valuation is still attractive due to the growth prospects. The company is growing at a rapid pace, and organic growth is complimented by acquisitions.
Future Growth Prospects and Uses
The company has a brilliant business model. The biggest portion of revenues comes from its services segment. The company generates more revenue from materials than sales of printers. Even if, the sales of 3D printers slow down, which I believe is not likely to happen anytime soon; the overall revenues of the company will continue impressive growth. The company has revolutionized the 3D printing market. 3D printing will be extremely important in a lot of industrial applications. I do not believe the market has even been properly penetrated at the moment. There is a lot of room for growth in the market, and 3D systems is well positioned to exploit this growth opportunity.
The company is penetrating the market with its affordable and competitive products. A lot of professionals need 3D printing to produce prototypes of the product before going through with the design. Furthermore, 3D printing will allow companies to customize products efficiently according to the needs of the customers. Industry experts are predicting that in five years, there will be a 3D printer in every home in America. If the prediction comes true, the company will have a lot of printing materials to sell. In addition, 3D printing will play an important role in the medical technology. Quality of medical implants can be enhanced with the help of 3D printing, and implants can be made according to the needs.
3D systems has launched a new, bigger printer, which can produce big prints. It has a larger printing area and uses the proprietary smart cartridges 3D Systems uses with entry-level Cube printers. Furthermore, the company is growing through acquisitions. Recently, 3D systems announced the acquisition of Geomagic, a modeling software company. The acquisition will strengthen the applications portfolio if the company can augment future growth.
Valuation and Risks
The stock is currently selling at 40 times the profit of 2013, which obviously makes it an expensive investment. However, long-term growth prospects of the company are good enough to justify the current price multiples. In the short-term, a new stock issue can be detrimental for the value of the stock. The company may want to take advantage of the valuation of the stock and decide to raise cash through a secondary offering. Another risk for the company arises from foreign exchange. 3D systems generates almost half of its revenues from its international operations. A strong U.S. dollar can affect the consolidated revenues of the company.
The main competitors of 3D systems are Stratasys (NASDAQ:SSYS) and France's Dassault Systems (OTCPK:DASTY). Another company operating in the 3D printing market is MakerBot. However, MakerBot is not public at the moment. Table below lists important metrics for comparison.
Debt to Equity
P/E ratios are substantially high in the industry, and valuation indicates the stock is currently trading at a premium. However, it is normal for a company with such growth prospects to trade at a premium. Margins and revenue growth are impressive for the company.
The stock has had a great start to 2013, and it has already gained over 15%. In the short-term, the stock may pull back a little. However, 3D systems can be a rewarding investment in the long-term. We are looking at a company with massive growth potential operating in a growing market. There is a lot of potential in the 3D printing market. I believe the stock will be able to record impressive returns during 2013. The increase in stock price may not be as high as the previous year. Nonetheless, there is a substantial upside potential with 3D systems. The stock will prove to be a winner in 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.