3D Systems: Boom Or Bust?

| About: 3D Systems (DDD)

Summary

Q4 revenue and net cash are reassuring.

The next quarters will be crucial for the company, with both Carbon3D and HP expected to launch their long-awaited 3D printers.

In a bull case, 3D Systems' stock price could double at least.

In a bear case, 3D Systems would not be worth much ... unless the company seeks a merger with rival Stratasys.

At last, 3D Systems (NYSE:DDD) decided to write down most of its goodwill, with management anticipating to book a $510-$570m charge when it releases FY15 figures on February 29. This decision is hardly surprising. Valuations in the industry have collapsed and 3D Systems is in the process of streamlining some of its operations, suggesting that the real value of the businesses acquired over the years is well below book values.

That said, even if goodwill writedowns negatively impact GAAP earnings and shareholders' equity on the balance sheet (3D Systems' equity will move to roughly $700m in Q4 from $1.25bn in Q3), they are non-cash items that do not have any impact on more important metrics such as cash flow and net cash (/debt).

It turns out that the company's net cash position remained rock solid in Q4 at $156m (almost flat quarter-on-quarter), illustrating once again that the company is not burning cash in spite of weak earnings. In the current risk-off environment in which cash is of paramount importance, this gives time to 3D Systems to revive its top line and improve its profitability.

Clearly, top line revival expectations could surface following the solid Q4 revenue number ($183m vs. a consensus of $161m), which points to slightly positive revenue growth at constant FX (vs. -2% reported). But in our view, it's a bit early to get carried away as this large beat follows a large miss in Q3, hinting at increased order/shipment volatility on a quarterly basis, as macro is uncertain and as competition is about to heat up.

Indeed, the next quarters will be crucial for the company, with both Carbon3D and HP (NYSE:HPQ) expected to launch their long-awaited 3D printers. If these new competitors fail to disrupt the market, 3D Systems could end up the year on flattish or slightly down revenues and potentially sharply up earnings, thanks to recent cost-cutting initiatives (mid or high-single-digit operating margin). But if Carbon3D and HP are successful, 3D Systems' revenue will probably decline at a fast pace, impairing the positive impact of cost savings (we would expect an operating loss).

In the optimistic scenario, 3D Systems would trade at only 6x 2016 earnings, suggesting in our view that the stock price could double, at least to reach a reasonable 12x P/E.

In the bear case, 3D Systems would not be worth much ... unless the company seeks a merger with rival Stratasys (NASDAQ:SSYS). As detailed in a previous article, such a deal could be an astute way for 3D Systems and Stratasys to resist the industry downturn and increased competition. At first glance, 3D Systems and Stratasys could cut SG&A by $40-100m (20-50% of 3D Systems' SG&A), representing a 60-150% upside on the newco's operating profit in FY16! We also assume that the newco would not cut R&D spending and that the combination of both 3D Systems' and Stratasys' research efforts would enable the newco to come up with new products and features and to better compete with its rivals.

In conclusion, we see the risk/reward on the stock slightly skewed to the upside. But we would like to see at least two quarters of top line and earnings resilience before becoming more aggressive on the stock.

Disclosure: I/we 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.