3D Systems (NYSE:DDD) has faced some tough times recently as the company's shares are down 36% so far this year. The stock has been dogged by news of new competitors in the market, such as Hewlett-Packard (NYSE:HPQ) and 3D Systems' reduction of its guidance in February. But, in my opinion, investors should capitalize on the recent weakness in 3D Systems' stock price since the company has got strong long-term prospects and looks capable of dominating the 3D printing industry for a variety of reasons.
Positives to consider
3D Systems' printing business is doing well as a result of its robust design and manufacturing. The company is focusing on various aspects of its operations to improve profitability and is actively hunting for opportunities to gain market share. Further, 3D Systems' business lines such as print material, service, and healthcare and consumer solutions have been important to its success so far, and the company isn't leaving anything to chance as it intends to dominate these markets. As such, it wasn't surprising to see 3D Systems post revenue growth of 52.4% in the last reported quarter since its products have gained good traction.
But it needs to be kept in mind that 3D Systems is also facing a challenge in maintaining its profit margin as a result of unfavorable product mix and new product announcements that require higher investments to promote. But, it should also be considered that these pains are more short-term in nature and could propel 3D Systems to new highs in the future.
Industrial growth is key
3D Systems' Direct Metal 3D printer is seeing strong demand. Also, major OEMs and service providers are adopting the company's ProX metal printer because of its capability to produce the most demanding industrial grade precision metal parts. 3D Systems' direct metal revenue grew 204% last year, driven by sales of its Phenix printers. 3D had acquired Phenix Systems last year, and now the company is reaping the benefits of the acquisition.
Going forward as well, 3D Systems should see the momentum in this sector continue as it continues to attack the industrial precision parts market with its robust printers. According to Gartner:
"As advances in 3D printers, scanners, design tools and materials reduce the cost and complexity of creating 3D printed items, the applications of 3D print technology will continue to expand to include areas such as architecture, defense, medical products and jewelry design."
The research firm goes on to say that 3D printing will redefine various industries such as consumer products, industrial, and manufacturing, while also having an impact on construction, education, energy, government, medical products, military, retail, telecommunications, transportation and utilities. By 2015, seven of the 50 largest multinational retailers are expected to sell 3D printers through their physical and online stores as Gartner predicts.
3D Systems has positioned itself accordingly to benefit from these applications. The company has made numerous acquisitions in the past couple of years as it is looking to tap each and every spectrum of the 3D printing industry.
For instance, 3D Systems recently acquired Xerox's (NYSE:XRX) Wilsonville-based team that has added over a hundred experienced engineers, including over 20 materials scientists, state-of-the-art facilities, and significant intellectual property to 3D Systems' portfolio. In addition, 3D Systems launched 12 new professional and design and manufacturing products at EuroMold, as it targets to become the leader in aerospace, automotive, medical device, and jewelry manufacturing.
Further, 3D Systems' recent acquisitions, such as Village Plastics, Gentle Giant and Digital PlaySpace should open up opportunities on the consumer and retail platforms. Also, 3D Systems is in a partnership with Google (NASDAQ:GOOG) for delivering the first ever high-speed continuous manufacturing of multi-materials 3D printer.
A premium, but worthy valuation
Hence, it can be clearly seen that 3D Systems is a pioneer in 3D printing. As the company continues to integrate its acquisitions, its products should see better margins and drive earnings growth in the future. This is what the analysts expect as well. 3D Systems' earnings are slated to grow at an annual rate of 23.17% over the next five years, eclipsing peers such as Stratasys.
While some might complain that the stock is expensive at a trailing P/E of almost 130, it should also be considered that it trades at a relatively cheaper forward P/E ratio of just 48. This signifies substantial earnings growth in the future, making 3D Systems a good buy on the recent pullback.
Hence, despite being overvalued, 3D Systems looks like a good pick since its earnings are expected to grow at a remarkable pace. With a slew of acquisitions and product roll outs, 3D Systems looks like a good long-term bet. So, investors shouldn't mind paying a premium for the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.