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Summary

  • The timing of 3D Systems’ equity issue is quite weird: the bulls will say that the company is likely to announce major acquisitions soon.
  • The bears will argue that 3D Systems cannot pay acquisitions in stocks anymore and is taking the opportunity of a stock price rebound to raise capital before cutting its guidance.
  • Deals in the services business (like the Robtec one) are likely to be welcome, as margins in services will be much more resilient than in hardware in our view.
  • But many analysts and investors are already focused on the integration risks related to 3D Systems’ M&A frenzy. This equity issuance will only add to their fears.

Last night, 3D Systems (NYSE:DDD) announced an equity offering of 6.84m shares, including a green shoe of 892k shares, which is expected to bring in more than $300m in cash and raise the group's net cash position to roughly $600m. The issue is 5-6% dilutive to 2015 and 2016 EPS.

What does the timing of this offering mean?

The timing of this issue is quite weird. First, the stock is down roughly 40% year-to-date, meaning that the dilution is much higher than it would have been just a few months ago. Second, 3D Systems' balance sheet was rock solid with $300m net cash and did not require an equity issue.

So, what does the timing of this equity offering mean? The bulls will say that the company is likely to announce major acquisitions soon. The bears will argue that 3D Systems' stocks are no more accepted as a payment method by sellers following the stock price collapse and that the company is taking the opportunity of a stock price rebound to raise capital before cutting its guidance. As a reminder, the company holds an analyst day in just a few days and this could be the opportunity for 3D Systems to update its guidance. In our view, both stances are valid and we will have a clearer view of what's going on June 10.

A M&A focus on services would be good news

It was pretty obvious that 3D Systems would remain active on the M&A front as the company's mid-term revenue guidance included acquisitions. Now, the question is what kind of companies 3D Systems is going to focus on?

We have been saying for a while that the printer business would soon experience significant competitive pressures as patents expire, leading ASPs and gross margins to decline fast. That was already the case in Q1 with a gross margin down 510bps in printers. And we believe this is just the beginning of the margin compression story in printers as competition heats up, with HP (NYSE:HPQ) or Autodesk (NASDAQ:ADSK) recently announcing initiatives. In all, we do not see a bright future for the printer business (or at least a future likely to support the stock's valuation) and believe that the services business could be 3D Systems' next area of focus. The group recently acquired the service bureau Robtec in Brazil and we would welcome similar deals in coming quarters, as we believe that margins in this business will be much more resilient than in hardware.

At risk of becoming a house of cards

Many analysts and investors have already highlighted the integration risks related to 3D Systems' M&A frenzy. This $300m equity issuance will only add to their fears and some could soon call 3D Systems a house of cards.

A house of cards usually falters when the underlying business weakens. If recent concerns about the 3-D printing outlook prove to be true, then 3D Systems will be the most at risk name within the 3-D printing universe. We reiterate our Long Autodesk / Short 3D Systems (see our January 23 article) and our Long Stratasys (NASDAQ:SSYS) / Short 3D Systems (see our February 27 article).

Source: 3D Systems: Bullish Or Bearish Stance On The Group's Equity Offering?