If you are a 3D Systems (NYSE:DDD) investor, 2014 hasn't been a kind year for you. 3D Systems has been battered badly and it is down close to 40%. In addition, the company's first-quarter results didn't bring much joy to investors. Although 3D Systems satisfied consensus estimates and reported a 45% jump in revenue, its earnings declined 28% from last year. Also, 3D Systems scaled down its guidance for the year.
However, there are some positive points that investors shouldn't ignore. For example, 3D Systems doesn't face as big a threat from Hewlett-Packard (NYSE:HPQ) as thought earlier. HP recently announced that it won't target the consumer 3D printing market and keep itself limited to what it calls "business 3D printing." In addition, 3D Systems' revenue has been growing at a rapid pace, indicating that the company is doing well in a fast-rising 3D printing market. Although earnings are declining, investors shouldn't forget that 3D Systems is investing in its business to capture more market share.
So, investors should not lose hope as 3D Systems can get back on its feet going forward. Also, it might be wise to make the most of the stock's weakness to buy more of 3D Systems. Let's see why.
Investments will drive growth in the future
3D Systems' revenue growth in the previous quarter reflects strong demand for its design and manufacturing printers. There was strong demand for direct metal 3D printers during the quarter, which exceeded its current manufacturing capacity. Keeping in mind the growing demand for its products, 3D Systems is expanding its present capacity. Because of this expansion, it made investments in the business that created pressure on its gross profit margin, which decreased around 130 basis points from the year-ago period.
Management believes that this platform will deliver high speed and advanced manufacturing methodology to various industrial and consumer goods. Although in the short term, this investment increases pressure on 3D Systems' profit margin, management is confident that it will result in greater benefits in the long run. According to management, "We expect our growth initiatives and accelerated investments to continue to expand our first mover advantage and increase our market share. And we believe that our unified sales force and channel focus can deliver continued success."
Healthcare prospects and acquisitions
3D Systems also saw increased demand in the healthcare category, where its revenue soared 53%. In this sector, 3D Systems is expanding into new applications with new products, materials, and services. To further expand its reach in this sector, the company has acquired Medical Modeling. Medical Modeling is known for personalized surgery and patient specific medical device solutions.
Moreover, Medical Modeling has FDA-cleared processes and cutting-edge expertise since it has already delivered thousands of surgical planning tools and facial prosthetic devices. 3D Systems anticipates that this move will increase its expertise in this rapidly growing category. In addition, 3D Systems has also announced the acquisition of Robtec, which is headquartered in Sao Paulo, Brazil. Robtec is the largest Latin American additive manufacturing service bureau and the leading 3D printing and scanning product distributor in the region.
Once the acquisition of Robtec is complete, 3D Systems should bolster its sales and services in Latin America. It will increase its reach throughout Latin America with locations in Brazil, Argentina, Chile, Uruguay, and Mexico.
The company also saw solid rise in consumer revenue. 3D Systems managed to achieve this by expanding its consumer product category beyond home use printers into education, entertainment, and consumer goods. It is also planning to extend its desktop design that will result in more affordable offerings to engineers, students, makers, entrepreneurs, and home users. In addition, its acquisition of Gentle Giant Studios will extend its reach in the entertainment and toy industry as well.
3D Systems anticipates accelerated growth in the consumer category during the second half of the year. This growth will be led by the company's plans to ship Cube 3, CubePro, and iSense scanners along with ChefJet, CeraJet, and CubeJet 3D printers.
These moves look impressive, and since Hewlett-Packard is not thinking of moving into the consumer space, 3D Systems investors need not worry. According to HP CEO Meg Whitman:
"We're focused on business 3D printing, not consumer 3D printing. We'll announce a 3D printing technology at the end of this year, and we think there's a real opportunity here."
The source goes on further to state that:
"Many have guessed that HP may cater to retail stores which offer 3D printing as a service. The fact that the company will not likely be participating in the consumer market, certainly bodes well for the various 3D printer manufacturers out there, small and large, who do."
Valuation and projection
3D Systems currently has a trailing P/E of 133, but its forward P/E looks attractive at 47. This is promising as it indicates earnings growth going forward. The stock is currently trading near its 52-week low and represents a good buying opportunity. In the short term, there might be some pressure on its profit margin. But, considering all the above factors and looking at its future prospects, 3D Systems seems to be a good investment option as its earnings are expected to grow at an annual rate of 23% over the next five years.
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.