- Recent sell-off created a buying opportunity for the long-term investors.
- The reaction to earnings outlook was premature, which caused the sell-off.
- The decision to spend more on marketing and R&D will result in sustained growth in earnings.
- Manufacturers continue to adopt additive manufacturing.
The movement in the stock price of 3D Systems (NYSE:DDD) is probably causing a lot of concerns for its investors - at the same time, it is undoubtedly offering a great trading opportunity to short-term traders to make some quick bucks. However, investors need to remember that it is a common trend in the companies operating in the hyper-growth period to show a high level of sensitivity to small pieces of news - a new partnership for distribution of products can result in a large upward movement in the price, and at the same time, a downgrade from a single analyst can bring the stock price tumbling down. This sort of price movement creates a great opportunity for short-term traders. The real question is that do you believe in the long-term potential of the industry? I do.
I have always maintained that the long-term potential of the 3D printing industry is real and the growth opportunity is there for the companies. 3D Systems is the main player in this industry, and the company will certainly continue to grow. The stock price came down after the recent update about the earnings - it is a credit to the growth of the company that organic growth figures of about 30% have disappointed the market. In isolation, if you offered me that number for organic growth I will bite your hands off. However, market is expecting the company to continually grow its organic growth rate, which is not possible for a company operating even in a hyper-growth sector. Nonetheless, the stock price is back up again, and I expect it to continue to go up.
The Message from the Management is Clear
Let's first look at the issue - the stock price came down due to the future outlook - the company announced that it will earn 83-87 cents over the next year, compared to the previous outlook of $0.93-1.03. Most of the times, the news is taken on its face value for the stocks that have high volatility in the stock price. We need to analyze the reason behind the decrease in the expected earnings. First thing to remember here is that the revenue growth is exceptionally strong and the company is expecting to double the revenue figures over the next two years. Now, how can the company establish this feat? By investing in the marketing and distribution channel.
The message from the management is clear: we are willing to sacrifice short-term margins in order to ensure better long-term margins. The long-term growth in margins is more important, in my opinion. In order to enhance the margins in the long-term, the company has to capture more market share. The investment in the marketing will ensure the company captures a larger market share and the products are marketed to a wider market, geographically and segment-wise. At the same time, the investment in the research and development is hugely important for the companies operating in this sector. In order to stay one step ahead of the competition, these companies need to invest substantial amount on research and development. It is one of the main expenditures for 3D Systems going forward, along with marketing expenses.
Stratasys (NASDAQ:SSYS) went through the same procedure earlier in the year, as the company announced to increase the spending on R&D and marketing. We need to remember that these two expenditures are essential for the long-term sustainability of the earnings. These two expenses are the main reason for a decline in expected earnings. I do not believe a decrease in earnings due to the increase in R&D and marketing warrants a decline in stock price. In fact, the long-term investors should be happy that the management is taking a long-term view of the business. Furthermore, 3D Systems generates a substantial portion of revenues from materials, which is a high-margin product for the company. At the moment, the company is focusing on increasing the sales of printers (low-margin product), which will increase the demand for the high-margin product (materials) in the future. I believe this factor will play an important role in doubling the revenues for 3D Systems over the next two years.
Big Boys are Choosing 3D Printing
ARC Group Worldwide (NASDAQ:ARCW), the largest metal injection molding company in the world, purchased ProX, a direct metal sintering (DMS) printer, from a reseller of 3D Systems. These new series of industrial level printers are capable of printing a wide array of parts with stainless steel, titanium, cobalt chrome, ceramics and aluminum. It is another proof that the manufacturers are taking 3D printing seriously, and 3D Systems is making strong inroads in the manufacturing segment of the 3D printing industry, which is the fastest growing segment in the industry at the moment. The cost and time constraints will likely restrict 3D printing from taking over injection molding; however, it should be kept in mind that this technology is consistently evolving and the printers are a lot faster and cost-effective.
The 3D printing industry has been around for some years now. However, only recently the bigger businesses have started to use it for manufacturing purposes. General Electric (NYSE:GE) is another manufacturer that uses 3D printing to manufacture some of the engine parts for its aviation business, which were previously manufactured through injection molding. Now GE has adopted additive manufacturing, the industrial level of 3D printing. The company has adopted 3D printing because it is more efficient than the traditional way, and saves huge material costs and gives strength to the parts, as discussed above. This gives an idea of how the 3D printing industry is growing on a huge industrial level. These two manufacturing giants were discussed here as an example of the potential of the technology in the industrial segment of the industry. It is clear that the growth potential is massive, and the bigger players in the 3D printing industry should benefit from this growth opportunity.
I remain bullish on the long-term prospects of 3D Systems in specific and the 3D printing industry in general. As I mentioned in my previous article, the stock is trading close to my price target ($64). In fact, it is trading at a slight premium, which is normal for companies operating in hyper-growth period. I believe the premium is, in fact, low considering the trend in the industry and there is still some potential in the short term for the stock to go up. However, long-term investors should keep in mind that the price will remain volatile over the next twelve months, but the overall trend in price will be upward in the long term, in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.