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Summary

  • FY 2014 guidance raise was not enough for 3D Systems, as investors pushed the share price below $50.
  • The company laid out the plan for strong revenue growth in the next two years, and strong expectations for the 3D printing industry through 2020.
  • EPS guidance was reaffirmed, and while this is somewhat disappointing, margin expansion is coming in 2015.

3D Systems (NYSE:DDD) finished lower almost 2% after the analyst day, as investors were not satisfied with the information the company provided. The revenue guidance hike was a good to see, but somewhat disappointing, given that it reflects the recent acquisitions, while the reaffirming of the EPS guidance was not encouraging at first. However, the company laid out encouraging growth trajectories for its business and for the 3D printing industry. The company also said that operating leverage should return in the second half of 2015, and we should see solid earnings growth in 2015 and beyond, together with robust revenue growth. Although the share price might continue to consolidate in the next few weeks, I believe that my $70 price target is reachable by the end of the year.

Analyst day highlights

3D Systems raised its FY 2015 revenue guidance from $680 million to $720 million to a new range of $695 million to $735 million. The mid-range of the new estimate ($715 million) is now closer to my expectations for $720 million, and I still expect that 3D Systems should deliver or slightly exceed my revenue expectations. On the other hand, the company reaffirmed its previous EPS guidance range of $0.73 to $0.85, but it should be noted that the guidance now includes the equity offering and all the acquisitions that the company has done so far. So, essentially, this should be regarded as good news, since the equity offering should have shaved off a few cents from the EPS guidance. However, investors were not impressed by the presentation, as the share price moved lower to end the day below $50.

These lines have also caught my attention:

1. The company expects that the 3D printing market will grow at a compounded growth rate of 32% from 2013 to 2020 (Wholers report is the source for the company estimate). On the other hand, Gartner expects an 81.9% CAGR from 2012 through 2017.

2. 3D Systems expects to reach $1 billion in revenue in 2015. Analyst estimates for 2015 are currently at $917 million, so there is room for upside revisions.

3. The global manufacturing market presents a $10.5 trillion opportunity, and the 3D printing market accounts for just 0.1% of the market. There is a large market for the 3D printing industry to grow into, and if 3D printing was just 1% of the overall manufacturing market, the size of the market would be around $105 billion, or 10 times larger than it is today.

4. The company expects flat gross margins in the second half of 2014. The gross margin should be between 55% and 60% once the company's revenue is above $750 million. Higher margins should be achieved with higher materials and software revenue as well as from higher healthcare and services revenue.

However, most of these figures are not new, as the company stated its $1 billion revenue target in 2015 previously, and the Gartner and Wholers reports were already out for some time. What is important here is for the management to deliver on its promises. The acquisition-fueled growth path is expected to continue, and the company may deliver above the current views if it does a larger acquisition soon, which it might do if we take the recent equity offering into account, since the company already had sufficient funds to do minor acquisitions. A potential acquisition might also be a catalyst for the share price, and a reason for a new guidance hike down the road.

Analysts are mostly positive after the analyst day. Most of them like the medical and metals side of the business, where they (and I) see substantial growth opportunities, while Hewlett-Packard's (NYSE:HPQ) entry into the 3D printing market was one of the main concerns, as well as the fact that 3D Systems is behind Stratasys (NASDAQ:SSYS) in the consumer segment. I covered most of these topics in my previous articles, and the comparisons between Stratasys and 3D Systems are discussed here. Stratasys is the leader in the consumer market, and its reported revenue is much higher than 3D Systems' consumer revenue. Stratasys's consumer revenue was $24.9 million and $20.6 million in Q4 2013 and Q1 2014 respectively, while 3D Systems' consumer revenue was $8.9 million and $9.7 million respectively. This is the area that 3D Systems needs to work on.

Price action

3D Systems started to move higher in late May, but the rise was disrupted by the equity offering, and the stock went back to trade around $50, which it has been doing for two months. The consolidation through time is what the stock might need in order to flush out the day traders and to make the shorts impatient. What the stock also needs to do is to get above its late May highs in order to get things going again. The move would probably cause some short covering, which should further boost the demand side.

(click to enlarge)

Source: Stockcharts.com

Conclusion

While the analyst day failed to excite investors, 3D Systems' growth road map is encouraging. Accelerating revenue growth in the second half of the year, the return of operating leverage in the second half of 2015 and the expected earnings expansion are the key takeaways from the analyst day. The rise of 3D printing and an expected 32% compound growth rate from 2013 to 2020 should help the company grow at a fast pace in the future and deliver value for its shareholders. 3D Systems' share price needs to move above its late May highs to get things going and move closer to my $70 price target.

Source: 3D Systems: A Look At Analyst Day And The Future