Two weeks ago, I argued that 3D Systems (NYSE:DDD) is set to rally and that the reward/risk ratio is favorable for the bulls. 3D Systems is down almost 10% since the article was written, and the decline is the consequence of the secondary offering the company did last week. I believe that the secondary offering adds nothing to the bear side, except for the 5.8% dilution. On the plus side, the company is raising the necessary funds to continue its acquisition strategy, which has helped the company to grow considerably in the past few years, but has also added integration risks, which have not been a problem for the company so far. I am reaffirming my $70 price target, and the reward-risk ratio is now even more on the bull side. The secondary offering should be just a short-term bump on the road to a higher share price.
Thoughts on the secondary offering
There is nothing new here. The company is continuing its acquisition-fueled growth path, and the additional funds should help the company zero-in on other potential candidates. The gross proceeds should be $327 million (or around $50 million higher, if underwriters take advantage of the over-allotment option), and should boost the company's cash balance to almost $700 million, which translates into about 15% of the current market cap. As to where the money will go, the company indicated at the Bank Of America Merrill Lynch Global Technology Conference that acquisition candidates are less on the hardware side and more on the side of materials in quick parts, medical and expansion into other geographies, as well as adding expertise in order to enhance the available product and material offerings. My conclusion here is that the secondary offering is good for the company, as it intends to broaden the company's ability to solidify its position in the rapidly developing 3D printing space.
Worries about cheap printers are overblown
Lately, I have seen a lot of arguments that 3D Systems and other companies in the field will face competition from companies that will offer cheap printers, and that this will put a dent in 3D Systems' bottom line down the road. While this may be true, it will mostly impact the consumer part of the business, since the industrial side relies on more robust machines that are not very cheap, and this side of the business is not that easy to penetrate into. And the industrial side is the one with the most growth potential for 3D Systems in the future. 3D Systems has good long-term relationships with numerous companies in this space and is being quite aggressive with product launches and acquisitions, and most of the competitors will probably stay behind. However, the competitive threats are not to be discarded easily, and we are still waiting for Hewlett-Packard (NYSE:HPQ) to make its move in order to assess the potential danger for 3D Systems, Stratasys (NASDAQ:SSYS) and other companies in the field. For now, 3D Systems is benefiting from strong demand across its business segments, and these trends are likely to continue in the future.
Reward-risk is still favorable for the bulls
In my previous article, I have laid out a bull and bear thesis for 3D Systems, and pointed out that the reward-risk ratio is in favor of the long side. The situation has changed a little bit since, but I am keeping my $70 price target, which translates into 40% upside from the current price, while the downside should be limited to $40 to $45, which means a 10% to 20% downside from here.
3D Systems continues to pursue its aggressive, acquisition-based growth strategy. While the strategy poses integration risks, they were not an issue for the company so far. While the competitive threats are more or less evident, 3D Systems remains in a good place to benefit from the strong demand and growth across its business segments. The potential acquisitions might add more to the top and bottom line going forward, and analysts are likely to change their estimates upward in the next couple of months as the management takes another look at FY 2014 guidance after the Robtec acquisition gets completed, and as the second half of the year gets underway, which will allow more visibility into the growth potential through the rest of the year. Fellow contributor Bill Maurer offers some insight into 3D Systems short-interest, and short-squeeze potential, which may be an added benefit to my own bullish thesis. Additionally, 3D Systems is having its Analyst Day next Tuesday, and this might be a catalyst for the short squeeze.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DDD over 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.