- 3D Systems is making aggressive investments to capture more market, and this is reaping results, as seen in its terrific revenue growth.
- 3D Systems has made a key acquisition to address healthcare, and this market is expected to account for most of 3D printing revenue going forward.
- 3D Systems' partnership with Google on Project Ara can be a big growth driver.
- 3D Systems' valuation, balance sheet, and earnings growth projections also indicate that it could be a solid investment.
Shares of 3D Systems (NYSE:DDD) have suffered massively this year. The stock is down close to 50%, and terrific year-over-year revenue growth of 45% in the first quarter couldn't rescue 3D Systems either. In fact, 3D Systems shares dropped almost 10% after the company reported that earnings were down 17% from the prior-year period, missing analysts' estimates. However, the company reiterated its full-year guidance, suggesting that there won't be any more pain going forward this year. In addition, the company's recent partnership with Google (GOOG, GOOGL) for Project Ara and improvements in the business mean that there could be better times ahead.
As such, investors should consider capitalizing on the stock's recent drop by buying more shares. Let's see why.
Investments are reaping results
3D Systems missed earnings because the company has been investing in its products to gain more traction. During Q1, it increased its R&D expenditure by about 165% to $17.2 million to drive accelerated product development. Such investments seem to be bearing fruit, as revenue from sales of 3D printers and other products increased 53% to $60.8 million year-over-year in the previous quarter.
In fact, 3D Systems saw growth of 76% in design and manufacturing of printers. In addition, the higher placement of advanced 3D printers led to a jump of 41% in materials growth rate. Also, the company exited the quarter with a backlog of $28.8 million. 3D Systems' backlog in March 2014 included $17.9 million of printer orders. This illustrates an increase in demand for the company's Direct Metal 3D printers that are in great demand, which the company is finding difficult to meet.
Also, 3D Systems is continuing to invest in research and development to expand sales, and it is also undertaking marketing activities to accelerate growth, new product development, and marketplace expansion. Moreover, 3D Systems is also increasing its manufacturing capacity to accommodate rising demand.
Key acquisitions to drive growth
At the same time, 3D Systems has been executing on acquisitions and strategic partnerships to broaden and enhance its 3D printing ecosystem, extending the 3D printing digital thread across its entire portfolio, from consumer to healthcare to industrial manufacturing. As such, 3D Systems acquired Medical Modeling in April, which showcases its urgency to significantly expand its reach and expertise in the rapidly-growing healthcare category.
By 2025, Luxe Research estimates that the 3D printing market will be worth $8.4 billion. Of this, the medical, automotive, and aerospace industries will account for 84% of the market. At present, medical accounts for just 1.5% of the entire 3D printing market, hence there is a lot of growth potential here, and 3D Systems is looking to make the most of it.
There are substantial organic and inorganic opportunities in this market, such as personalized surgery and patient-specific medical devices that 3D Systems is targeting. So, the company is expecting an increase in demand for its design and manufacturing solutions to continue driving its growth going forward.
In addition, 3D Systems is extending its desktop design and prototyping reach by delivering more affordable offerings to engineers, students, makers, entrepreneurs, and home users. Also, through acquisitions like Gentle Giant Studios, it is extending services to the entertainment and toy industries.
The Google factor
3D Systems has strengthened and expanded its strategic partnerships with leading global brands and taken steps to leverage its existing expertise and synergies in key markets. Its tie-up with Google on the ambitious Project Ara was one such move. Project Ara intends to make a modular smartphone for customers, and this could be a big opportunity for 3D Systems. According to Google --
"The smartphone is one of the most empowering and intimate objects in our lives. Yet most of us have little say in how the device is made, what it does, and how it looks. And 5 billion of us don't have one. What if you could make thoughtful choices about exactly what your phone does, and use it as a creative canvas to tell your own story?
Introducing Project Ara.
Designed exclusively for 6 billion people."
So, Google seems to be targeting a lot of consumers with this project. The reason why this is good news for 3D Systems is because it will be 3D-printing these modular smartphones. According to Tech Times --
"3D Systems, which partnered with Google's Project Ara team, is not using conventional 3D printing process to create the miniature components of Project Ara's ambitious new modular smartphone.
In place of the typical "reciprocating platform" typically used in 3D printing, which is characterized by speed increases and decreases that add up to lengthen the printing time, 3D Systems is creating a more streamlined process called a continuous motion system that will allow the company to print "millions and hopefully billions of units."
"To bring the modular cell phone experience to the market by the anticipated 2015, we are creating a continuous, high-speed 3D printing production platform and fulfillment system to accommodate production-level speeds and volume. This methodology breaks away from the 'reciprocating platform' of many contemporary 3D printers," writes 3D Systems on its blog."
So, 3D Systems is looking to bring new technology to manufacture modular smartphones. Since Google is targeting billions of customers with this project, and will probably price its modular smartphones as low as $50, it could end up selling a lot of devices. This would mean a lot of 3D-printed phones, so 3D Systems will benefit.
Valuation and conclusion
3D Systems trades at a forward P/E of 40, which seems quite cheap considering its earnings are expected to grow at a CAGR of 23% for the next five years. In addition, 3D Systems has a very low debt figure of less than $19 million, while its cash position is strong at $306 million. So, the company can easily continue making investments and acquire new companies to enhance its presence in the 3D printing industry.
All in all, there are numerous catalysts that could drive 3D Systems going forward, as we saw above. As such, investors should definitely consider utilizing the stock's recent drop to buy more shares.
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.