3D Systems Will Likely Rise In Second Half Of The Year

Jun.12.14 | About: 3D Systems (DDD)


Faster 3D printers will likely increase the use of 3D printing in the manufacturing process.

Top line growth is not translating into bottom line growth due to increased expenses for expansion.

The stock price of 3D Systems is likely to be range bound over the next few days, but it should rise in the second half of the year.

3D printing technology has been the subject of intense debate - there are two extreme opinions when it comes to 3D printing: First group believes that the technology will replace the traditional manufacturing process and it will be a success. However, the second group believes that this is all a hoax and 3D printing technology will fail to go mainstream. In my opinion, the future of the technology is in the middle of both these extremes.

3-D printing has already had a massive impact on prototyping. Before 3D printers, it used to take months or days to build a prototype. However, it can now be done in hours. For engineers or inventors, 3D printing has changed the landscape completely as now they can test their ideas in a matter of hours. This has also resulted in efficiency in some parts of the manufacturing process as the speed of prototyping has increased and it now takes less time to reach the final product.

On the other hand, replacing the traditional manufacturing process in the near future is a far cry in my opinion. There are many reasons for it. However, two of the most important reasons are the cost and time. First of all, manufacturing at a large scale will result in higher costs through 3D printing as the equipment and the materials are costly. In theory, 3D printing should decrease the cost as the same machine can give you variety (ability to print a number of different parts on the same machine), choice of materials, no lead time and lower wastage - in traditional manufacturing, a large amount of materials are wasted. However, in practice, the technology is still not applicable for mass production as the constraints about the size, cost and time remain.

3D Systems (NYSE:DDD) is one of the biggest players in the sector, and the company has a strong position in the industrial segment of the 3D printing industry. Recently, it announced that its Fab-Grade 3D printers have broken the speed barrier and it gives better speed than the traditional injection molding techniques. In my previous articles about 3D printing becoming an integral part of the manufacturing process, I have maintained that a decrease in the printing of finished product will be an important development and I believe we will see faster 3D printers over the next few years. The announcement about the Fab-Grade printer augers my belief that the technology is on course to play a larger role in the manufacturing process. This development opens up some opportunities for the company, and the manufacturers can follow just-in-time manufacturing of small parts at a larger scale. This is a significant step for 3-D printing technology as the time constraint is minimized through this development.

We have talked about the partnerships for 3D systems with some manufacturers such as Hershey's. The partnerships in the food industry as well as the businesses manufacturing small parts can work as the small parts can be manufactured at lower cost and in less time. However, I do not believe 3D printing will replace the assembly line in the near future.

The valuation of the stocks in the 3D printing sector has been dividing opinion as well. Valuing these stocks on the basis of multiples will not make them attractive to anyone as the businesses are still operating in the hyper-growth stage of the business cycle. The revenues are growing at breakneck speed and the businesses are making an effort to increase market share through geographic expansion. As a result, top-line growth is not being converted into the bottom-line growth. At the moment, valuing these stocks based on P/E ratios is not the right approach in my opinion. In my previous article, I talked about the new equity offering by the company and how it will impact the stock price in the above mentioned article, I said that I do not expect the new equity offering to take the stock price below its recent support price of $47.50. The below chart shows the price movement during the past month - the stock did not go below its support price.

Over the next few days, I believe the stock price will be range bound and we will not see a major rally in 3D systems. However, the second half of the year will push the stock price up as the company continues to expand its reach. The metal side of the business will contribute significantly and the medical segment will also be a vital part. The recent increase in the revenue guidance backs my theory of better performance in the second half of the year. My fellow SA author, ONeil Trader, has shed some light on the analyst day here.

Bottom Line

The speed of printing remains a hurdle in the way of 3D printing becoming an integral part of manufacturing. While the technology is still far from replacing the assembly line, I believe the increase in the printing speed for Fab-Grade printers is a positive sign and it might become a rival for injection molding. As I have said above, the technology is still at the early stages and the growth will remain rapid for the companies operating in the sector over the next few years. As the adoption rate for 3D printing increases, these companies will benefit heavily from the increasing demand.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.