Many analysts have often criticized 3D Systems (NYSE:DDD) for its mergers and acquisitions (M&A) and their prediction seems to be coming true (at least for now). Recently, 3D Systems released earnings guidance which was way below analysts' estimates, and the market did not receive it well as shares plummeted over 15% in a day. While every 3D Systems bear is gloating, I think their happiness is short lived.
The company noted:
"Willing to tolerate earnings reduction and even slight gross profit margin compression during this period to substantially accelerate our growth rate and market share."
While the M&A have eaten into 3D Systems' earnings, I think they will reap benefits in the coming years. 3-D printing is a fast growing technology; therefore it is important for 3D Systems to expand its market share and acquiring other companies is a good way to do it.
Moreover, 3D Systems' acquisition spree isn't absurd as each new purchase serves a different purpose. Let's take a look at the company's recent takeovers.
A sweet deal
Back in September 2013, 3D Systems completed the acquisition of The Sugar Lab, a startup micro-design firm based in Los Angeles, California, which focuses on 3-D printing customized, multi-dimensional, edible confections in real sugar. The Sugar Lab adopted 3D's own Color Jet Printing technology;
"to print on a sugar bed using different flavored edible binders that meet all food safety requirements."
As of now, printable sugar only has a small number of applications, but over time, 3D Systems expects the technology to evolve into;
"a variety of flavors and foods, powered by real food printers for professionals and consumers alike."
This acquisition gave 3D Systems a competitive edge over its peers as it allows the company to diversify its product portfolio and focus on a completely different type of client base. The company can move into creating edible binders and sugar-based objects for food services, bakers, and chefs. 3D Systems also plans to help create home-based products for amateurs to print sugar at home.
Then, in December 2013, 3D Systems completed the acquisition of Village Plastics, a manufacturer of 3-D printing filaments. Village Plastics is based out of Norton, Ohio, and is one of the leading manufacturers of 3-D printing materials including ABS, PLA, and HIPS. 3D Systems highlighted three key motives for the acquisition which are as follows:
· To widen the company's gross profit margin for the materials category that is quickly growing.
· To extend its filament materials knowledge base and manufacturing capacity.
· To speed up its development of thermoplastics for 3-D printing.
3D Systems claimed that it intended to;
"immediately integrate Village Plastics materials and manufacturing technologies to accelerate its development of advanced filament-based materials for its growing Cube and CubeX 3D printers."
The company also stated that it would continue to support every single one of Village Plastics' existing customers. Even though this acquisition serves a completely different purpose than The Sugar Lab, it's equally important. Moreover, since this will help 3D Systems widen its gross margin, it looks like a really good move.
Earlier in 2012, when General Electric announced the acquisition of Morris Technology, it was broadly believed that the company would jump into the 3-D printing technology, posing a threat to the existing players. However, in 2013, when GE announced that 3-D printing will account for nearly 50% of its manufacturing, it opened up huge growth opportunities for 3-D printing companies.
Presently, less than 10% of General Electric's manufactured products use 3-D printing. With annual sales of over $150 billion, GE's industrial output would be a massive growth opportunity for 3-D printing companies, and as GE is already a customer of 3D Systems, it may benefit the most from this opportunity. Moreover, in order to dictate the industrial sector, a company will have to develop printers that print materials like metal at a fast rate and 3D Systems has already taken care of this.
In mid-2013, 3D Systems completed the acquisition of Phenix Systems, a leading global provider of Direct Metal Selective Laser Sintering 3-D Printers based in Riom, France. Also, 3D Systems unveiled the new ProX 300 Direct Metal printer, the first fully rebranded Phenix printer now included in the Direct Metals portfolio. This new production printer leverages Direct Metal Sintering (DMS) technology, which is capable of producing fully dense, chemically pure end used metal parts.
Furthermore, the latest acquisition of Gentle Giant Studios, a privately held 3-D modeling provider, has given 3D Systems access to an exciting list of existing clients and character licenses to manufacture toys and other collectibles. Hence, it's obvious that each and every one of 3D Systems' M&A serves a unique purpose and this strategy will help the company outperform its peers.
So, 3D Systems' recent drop could prove to be a great buying opportunity as it is a short-term weakness. Criticism of the company's acquisition strategy is unwarranted as 3D Systems is focusing on different areas of additive manufacturing through its acquisitions, positioning itself to benefit from different areas of the 3-D printing market in the future.