In 2013, 3D Systems (NYSE:DDD) was one of the best performing stocks. It achieved an astounding return of 147% vs. the S&P 500's 28%. Those who invested in it earlier benefited from the stock's rising momentum while those who followed a value-investing approach missed an excellent opportunity to make a huge gain. As an investor who likes to use 'a business mindset' to analyze stocks, I want to share my thoughts on 3D Systems' future prospects and its intrinsic value, so investors would have an idea of when it might be a good time to buy or stay away from the stock.
3D Systems is a leading maker and service provider of 3D printers, print materials, on-demand parts and 3D printing services for professionals, manufacturers and consumers. The company pioneered 3D printing over 25 years ago, and the founder, Charles W. Hull (Chief Technology Officer), invented stereolithography, which is the technology behind 3D printing. Today, the company makes all kinds of 3D printers, print materials, on-demand custom parts, scanners and software. These solutions allow users to design their products and print them as prototypes and moving parts more rapidly and cost-effectively than through the traditional manufacturing process. Users can print toys, shoes, moving parts for cars, models, tools, hearing aids, food, etc. The materials that can be used for 3D printing include thermoplastics, metals, ceramics, and edible sugar.
As of Q3 2013, the company earned most of its revenues from the sale of 3D printers, print materials and related services. In terms of revenue by geography, the company earned 54.9% of its revenues from the U.S., 24.1% from Europe and 21% from Asia-Pacific.
Future Growth and Prospects
I believe that 3D Systems has enormous growth opportunities in the professional and consumer markets as 3D printers become more popular, practical and affordable. The company has been growing rapidly in the past 5 years through acquisitions as well as organic growth. For example, for the first nine months of 2013, its total revenue grew 42.3% compared to the same period of last year. And in the past five years, its total revenue grew between 40 to 55% each year (see below image), except in 2009 when the company was still recovering from the 2008 recession.
(Source: 2012 Annual Report)
While 3D printers are largely used by designers and professionals, 3D Systems is creating 3D printers such as the Cube-series that are tailored to consumers. I believe that the 3D printing industry is still in its early stages-even though the technology has been around for over 25 years-and 3D printers will eventually be used by most consumers like our existing printers. "The question in my mind is not 'Will we have a 3D printer in each home?' but 'Which room will it be in?'" said Avi Reichental, the CEO of 3D Systems. "Will it be in your garage? Will it be in your kids' room, or the man cave... Or the wardrobe?" (Source: 3D Systems Investors)
At the time of writing, I believe 3D Systems' current stock price of $91.58 per share or $9.4 billion in market cap is largely overvalued. Based on my estimate, its intrinsic value should be somewhere between $51.8 and $73.3 per share (or between $5.3 billion and $7.5 billion in market cap). I used a Discounted Cash Flow model to estimate the company's intrinsic value. In addition, I used the company's cash flow from operations instead of free cash flow because the company is still in its early growth stage and because its free cash flow has not been consistent in the past few years.
I estimated 3D Systems' intrinsic value in three scenarios: Fair, Conservative, and Optimistic Valuation.
- Fair Valuation - $73.3 per share or $7.5 billion in market cap if the company grows about 35% each year in the next ten years.
- Conservative Valuation - $51.8 per share or $5.3 billion in market cap if the company grows about 30% each year in the next ten years.
- Optimistic Valuation - $102.9 per share or $10.6 billion in market cap if the company grows about 40% each year in the next ten years.
At this moment, I believe that the fair valuation scenario is most probable where 3D Systems' current intrinsic value should be around $73.3 per share or $7.5 billion in market cap. This means that the company's current stock price is traded a large premium and that investors expect the company's revenue and profit will grow by at least 40% each year in the next five to ten years to justify its current market cap of $9.4 billion.
The Bottom Line
Based on 3D Systems' business and growth prospects, I believe it is a great mid-cap stock for long-term investing. However, its current stock price is traded at a large premium and I would suggest waiting for the stock to drop below $73.3 per share or $7.5 billion in market cap before buying it, because that would allow for a better margin of safety.
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