3D Systems (DDD) has just pre-announced its Q4 and FY13 figures. Let's make it short: they are ugly. The company expects its non-GAAP FY13 EPS to be in a $0.83-$0.87 range, below its guidance of $0.93-$1.03 and consensus at $0.96. For FY14, 3D Systems expects revenue to be in a$680m-$720m range and non-GAAP EPS between $0.73 and $0.85, vs. $671.3m and $1.27 respectively for the Street.
In its press release, 3D Systems explains that the earnings miss is mainly attributable to increased R&D spending and sales & marketing initiatives to sustain growth. The strategy makes sense … but also suggests that revenue growth is much costly than initially anticipated.
We are also concerned that the entry into the consumer segment is starting to weigh on margins, relative to expectations. Gross margin was only flat in Q4, while it was slightly up in the previous quarter.
In all, we stick to our view (see our previous SA article here) that 3D printing is a promising business … but that expectations have gone too far. We believe that we are still at an early stage of the EPS downward revision process for 3D Systems: some key patents are set to expire between 2014 and 2017, notably the laser sintering patent (owned by 3D Systems) which is due to expire in February 2014. This should spark pricing pressures across the industry as open-source hardware printers will be able to integrate laser sintering. Current competitors are likely to take this opportunity to offer much cheaper printers and new competitors are likely to emerge. In our view, the potential gross margin pressure stemming from this increasing competitive environment is not yet reflected in consensus forecasts.
Against this backdrop, we view 3D Systems' valuation as unsustainable. Post warning, the stock (current price $57) is trading at roughly 70x its 2014 EPS. Even assuming 3D Systems gets back to 30% earnings growth trend, its valuation would compare badly to Google's: 20% EPS growth for a 2014 P/E of 22x, i.e. a PE/Growth slightly above 1x.