The analyst day that 3D Systems (NYSE:DDD) will hold on Tuesday, June 10 is widely expected to give management the opportunity to discuss its recent $317m equity offering. In our previous article we said that we had some concerns about this offering and its timing. 3D Systems' balance sheet was indeed rock solid with $300m net cash (now more than $600m) and did not require a capital increase. And issuing equity after a 40% stock price decline was obviously not perfect timing. In our view, this could suggest that 3D Systems' stock was no more accepted as a M&A payment method by sellers following the stock price collapse and that the company was taking the opportunity of a stock price rebound to raise capital before potentially cutting its guidance.
It looks like our concerns have been shared by many other investors. The stock is now trading below the offering price and the 10% price decline since announcement is above the EPS dilution (6%).
This clearly puts pressure on management and CEO Avi Reichental will have to reassure on the company's business fundamentals (will the guidance be maintained?) and to provide more color on its M&A policy.
Message on the 2014 guidance will be key
In our April 29 article ("Trading Buy Or Falling Knife?"), we highlighted that management's tone regarding the 2014 guidance (initiated just a few weeks before) appeared less confident in the Q1 press release. Management reiterated "its 2014 guidance, expecting revenue to be in range of $680 million to $720 million and its GAAP earnings per share to be in the range of $0.44 to $0.56 and non-GAAP earnings per share to be in the range of $0.73 to $0.85". But management added a sentence that was not included in the initial guidance: "Additionally, management expects a greater portion of revenue and earnings to be generated during the second half of 2014, as the full impact of its new products and services materializes."
This more cautious approach could imply that 3D Systems finally took notice of the severe competition risks we have been highlighting since the beginning of the year. Our thesis is that the expiry of key patents between 2014 and 2017 is sparking increased competition and pricing pressures across the industry as open-source hardware printers are now able to integrate technologies such as laser sintering, as illustrated by the recent Autodesk (NASDAQ:ADSK) or HP (NYSE:HPQ) initiatives.
Could 3D Systems go one step further and cut its guidance? That's a possibility in view of the weak industry environment (numerous warnings). But if the company leaves its guidance unchanged, it will have to convince investors about its H2 product pipeline and its ability to preserve its gross margins despite increasing competition.
M&A: large deal or expansion into services?
With $600m net cash, 3D Systems has the firepower to make a large acquisition, the usual suspects being ExOne (NASDAQ:XONE), Voxeljet (NYSE:VJET), Arcam (OTCPK:AMAVF). Such a deal could scare investors for several reasons:
1) These companies still boast high valuation multiples and some of them have been experiencing operating difficulties, suggesting that an acquisition could give rise to a significant write-off in just a few quarters.
2) Many analysts and investors are already focused on the integration risks related to 3D Systems' M&A frenzy of the last years. A large acquisition would only add to their fears.
In all, we believe that a step-by-step M&A approach vs. a large deal would be reassuring for the financial community. Specifically, we hope that the services business will 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.
We reiterate our long-term negative stance on the stock as we consider that 3D Systems is still overvalued (see our "$83 or $26?" article). That said, 3D Systems could be a short-term trading buy candidate: if the company leaves its guidance unchanged, this could spark a relief rally in view of the negative stock price reaction following the equity offering.
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.