3D Systems Corp. (DDD) is one of the most watched stocks in the market today due to its leadership role in the growing 3D printing industry. 3D printers are supposed to be the next high growth industry along with medical marijuana. This has made the stock price of all 3D printing stocks in the industry increase exponentially in a short period of time. ExOne (XONE) has seen its price jump after its IPO last month despite negative reports about the 3D printing industry. DDD is the biggest 3D printing stock with a market capitalization of ~$3 billion. However, some analysts have called the whole industry a bubble because these companies are trading at astronomical valuations, as the earnings are not big enough to justify such high stock values. I am not that skeptical about the stock like the rest of the DDD bears and think that the 3D printing industry has a bright long-term potential. 3D Systems is not some Chinese fraud and has real products with real revenues. However, I would not buy DDD stock hand over fist given the high valuation and would wait for a better entry point.
What Does 3D Systems Do
3D Systems is a provider of three-dimensional (3D) content-to-print solutions such as 3D printers, print materials and custom services. The company sells printers both for personal and professional use. DDD's professional printers are used for product development, for custom manufacturing of advanced oral and orthopedic restorative devices, custom jewelry, mass customized toys, action figures and collectibles. The company's personal printers are used to make custom products for home and school use. The company blends, markets, sells and distributes consumables, engineered plastic and metal materials and composites under several brand names for use in all its printers. 3D Systems also provides a variety of customer services, local application support and field support for all its stereolithography and selective laser sintering 3D printers. For its personal and professional 3D printers, it provides these services and field support either directly or through a network of authorized resellers or other sources.
3D Systems - Advantages
- High margins -3D Systems managed to expand its gross margin (GM) by 390 bps in the last quarter to 51.2%. The company also has high double digit operating and net margins. 3D systems has shown a consistently increasing gross margin trend over the last several years with the gross margin growing from ~40% in 2008 to ~51% currently. The company will be able to expand its operating and net margins as it exploits economies of scale.
- Relatively low competition - There are very few companies that make 3D printers for personal use which means that DDD will be able to maintain high margins for the foreseeable future. The market size is currently too small for big players like Xerox (XRX) or HP (HPQ) to enter the industry in a meaningful way. The acquisitions and mergers by leading companies such as 3D Systems and Stratasys Ltd. (SSYS) have further reduced competition in the industry.
- Profitable market leader in a fast growing industry - 3D Systems is the largest pure play company in the 3D printing industry with quarterly sales of over $100 million. 3D Systems sells a broad portfolio of printers for both personal and professional use. It also generates significant revenues from selling customer parts and services. The company is quite profitable which is a positive since small companies in new industries are generally loss making (examples are Westport Innovations (WPRT), Solazyme (SYZM) etc.). The company expects full year revenues of $440 -$485 million which means 30% growth year on year with earnings expected to grow even more by ~40%. Most of the growth is expected to be organic in nature as the company will slow down its acquisition binge.
3D Systems - Risks
- Valuation remains expensive - While 3D System's valuation has decreased after the quarterly results and the stock pullback, it is still quite expensive with P/S of 5x and P/B of 6.2x. The trailing P/E of 46x is also not cheap by any yardstick. However, the valuation will not seem expensive if the company can meet or beat its earnings expectations for 2013.
- Growth has come inorganically - 3D Systems has been on a buying spree in the last couple of years which has increased its revenues. Organic growth on the other hand is not that impressive . 3D Systems has been buying companies using its high priced stock instead of cash. 3D Systems has been able to raise funds by issuing equity as market interest remains high in the company. However, it will find it difficult to use this strategy to grow as the stock price has corrected sharply in the last couple of months.
- Stock is volatile - DDD stock has been highly volatile of late as investors have started to question the quality of growth and earnings. A Citron report called the whole sector a bubble, which led to a sharp fall in the stock price. Investing in new industries with uncertain prospects means that investors should be prepared for a roller coaster ride. Stocks in hyped up industries can give both big profits and big losses. Solar stocks are good examples of how market darlings turned lepers overnight.
3D Systems Financials
3D Systems has got a decent balance sheet for a fast growing company, with net cash of ~$75 million and free cash flow of $49 million. The company has managed to increase both gross and operating margins in the last few years. The company's balance sheet remains healthy with a debt equity ratio of just 0.18 and both current and quick ratio remain above 3.
The company has grown revenues at an annual rate of ~77% in the last 5 years (mainly through acquisitions). Analysts estimate that the company will grow by ~25% over the next 5 years, which is almost 9 percentage points higher than the rest of the 3D printing industry.
DDD's stock has shown a stellar performance over the last year doubling to $32. Despite the 100% return, other competitors like Stratsys (SYSS) have outperformed DDD returning over 500% in the same time period. All 3D printing stocks have been on a tear over the last year outperforming the broader markets (S&P 500 and Dow Jones up ~12%). DDD stock has dropped by ~30% from its peak value of ~$45 reached in late January.
3D Systems is a highly volatile stock with both proponents and opponents holding extreme views about the company and its prospects. 3D Systems stock has come down quite a bit in the last few months due to concerns about excessive valuations. There are some issues about DDD such as quality of growth, expensive valuation, excess stock marketing etc. However, I think these problems are a bit exaggerated. 3D printing remains an exciting growth opportunity in a slow low growth world. I would watch the stock closely to see how it performs over the next year. I am not that bearish about the stock and hold a more neutral view. If the stock falls and the valuation becomes more reasonable, then I would not mind building a small speculative position.