Seeking Alpha
Long/short equity, value, growth, momentum
Profile| Send Message|
( followers)  

Summary

  • 3D Systems has taken a massive beating this year, but investors need to look beyond the short-term pain.
  • 3D Systems is aggressively investing in new products and acquisitions for growth.
  • Driven by strong prospects in the medical 3D printing market and the overall 3D printing industry, 3D Systems is on track to deliver growth in the long run.

Things have gone from bad to worse for 3D Systems (NYSE:DDD) this year. The once high-flying 3D printing company is down almost 50% in 2014 as its results have disappointed Wall Street. Despite reporting solid growth in revenue, 3D Systems hasn't been able to translate it into earnings growth. However, the 3D printing industry is expected to be worth a massive $16.2 billion in 2018, from just $2.5 billion last year. This translates into a CAGR of 45.7%.

Being a growth stage company, 3D Systems is aggressively investing in innovation, and this will no doubt affect its bottom line. But this will also lead to long-term growth.

In the second quarter, 3D Systems' revenue grew 25% year-over-year. But, at the same time, its bottom line declined 77% year over year as 3D Systems invested aggressively in product development. In fact, 3D Systems' research and development expense almost doubled year over year to $17.7 million in the second quarter. This was a key reason behind 3D Systems' drop in earnings. However, these investments are positioning the company to tap the long-term opportunity in 3D printing.

Investing for growth

R&D is one of 3D Systems' priorities. It has more than doubled its R&D expenditures, and these investments will help the company accelerate product development. The company has already launched 10 new products in the first half of this year, driven by its innovations. In fact, new product revenue increased 49% last quarter, signifying 3D Systems' strong product innovation. The company has lined up more launches in the second half of the year, and this should add to its revenue growth.

3D Systems is also making huge strides in the healthcare business. In fact, revenue from healthcare was up 46% in the previous quarter, driven by an expansion of the user base and product adoption. The company made a smart move by acquiring Medical Modeling.

Although the terms of the deal were not disclosed, 3D Systems said that it will become immediately accretive to earnings. This acquisition has added virtual surgical planning, guiding, and 3D printing of medical devices to 3D Systems' portfolio.

Now, Medical Modeling should allow 3D Systems to tap a fast growing medical 3D printing market. The opportunity here is huge, as 3DPrint.com would have us believe:

"Drug testing is what empties the pockets of many of the pharmaceutical companies out there. Each year, over $40 billion is spent on clinical trials in the United States alone. Companies like Organovo are working on 3D future-3printing human tissue, which in the short run will allow pharmaceutical companies to test their drugs on human cells without a risk to human beings. Other companies are also working on similar technology. If just 10% of the funds used during clinical trials are funneled into such technology, that would equate to $4 billion annually, just right there. Now if you consider the possibility of printers being sold just for the purpose of printing out prosthetic devices, or even actual organs, like a liver, that number could easily quadruple."

To improve its chances of tapping this market, 3D Systems has also decided to acquire Simbionix, a leading provider of the 3-D virtual reality surgical simulation and training products, for $120 million. This deal will expand 3D Systems' reach in personalized medical services, and provide it a better opportunity of tapping the medical market.

3D Systems is also developing a high speed, fab-grade 3D printer platform with polymer and conductive materials. The company believes that this will increase 3D printing production speeds, satisfying industrial and consumer goods applications.

New products and acquisitions will aid growth

3D Systems has started commercially shipping the new CubePro printer and iSense scanner. It is on track to start shipping the new Cube in August. In addition, 3D Systems is witnessing good demand for its direct metals printers. After successfully utilizing the full production capacity of its Phenix manufacturing facility, 3D Systems is bringing online a new system manufacturing facility. This facility is expected to start working during the third quarter, and enhance 3D Systems' production capacity for metals printers.

3D Systems has also diversified sales of metal printers into areas such as automotive, aerospace, and medical. It is now using metals printers in its quick parts services.

3D Systems is also moving into Latin America with the acquisition of Robtec in Brazil. Although the full terms of the deal were not disclosed, 3D Systems will acquire 70% of Robtec at first, and the remaining 30% on the fifth year of the deal closing. With this move, the company plans to "establish a strategic sales and service platform and a scalable gateway into Latin America." This acquisition will expand 3D Systems' footprint into the emerging South America region, positioning it for long-term growth.

Tapping the market effectively

As such, 3D Systems is making the correct moves by making acquisitions to bolster the business, and investors should fret much about its short-term weakness. In fact, 3D Systems is already doing well to tap the market. For instance, in the previous quarter, demand for 3D Systems' design and manufacturing printers increased 126%. In addition, printing materials revenue expanded 30%, while services revenue increased 38%.

Looking ahead, the traction is set to continue, as 3D Systems reported an increase of 77% in bookings over the last quarter. Currently, the company has a record backlog of almost $32 million, including $23.1 million for professional, production and consumer printers.

There reasons why 3D Systems' order book has expanded in recent times is simple. The company is seeing greater demand for its direct metal printers. This category is growing at a faster rate than manufacturing capacity. Also, management is looking to deliver the best experience to customers. As a result, the company has decided to postpone shipments of new consumer products in a bid to enhance its product. This has resulted in an increase in the backlog.

At the same time, 3D Systems has been able to stabilize its operating expenses. Its operating expenses were flat sequentially. This is important, as the company is aggressively investing in product development, sales, marketing, and manufacturing capacity.

Conclusion

All in all, 3D Systems seems to be making the right moves. The industry is expected to grow at a fast pace, and 3D Systems is on the right track to benefit from it by way of its acquisitions and product development. The company's bottom line might remain under pressure in the short run, but over the next five years, its earnings are expected to grow at a rate of 22% a year, better than the 15% industry average for earnings growth, which is different. So, investors need to look beyond the short-term issues as 3D Systems looks like a solid long-term bet.

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.

Source: 3D Systems: Looking Beyond The Short-Term Pain