3D Systems: Q2 Rally Stretches Limited Relative Value

| About: 3D Systems (DDD)


3D Systems soared on a Q2 beat based mostly on cost controls.

The industry continues to expand and 3D Systems isn't showing an ability to capture that growth.

The stock isn't expensive, but 3D Systems doesn't offer a better relative value that has typically been the case in the sector.

The perplexing story surrounding the 3D printing sector has always been the favoritism with 3D Systems (NYSE:DDD). The company originally had a charismatic founding CEO that was active in the financial media, but 3D Systems hasn't always delivered the goods for investors.

The 3D printing sector ran into a brick wall combination of over investment, the feared entry of HP (NYSE:HP) into the industrial sector, and bad strategies in the consumer sector over the last couple of years. The sector stocks that includes Stratasys (NASDAQ:SSYS) have shown some life this year, but several reasons exist to question the relative value of 3D Systems.

Missed Industry Growth

One wouldn't know this from listening to 3D Systems or Stratasys, but the 3D printing sector saw substantial growth in 2015. Wohlers listed (via Forbes) industry growth at nearly 26% last year to a total market value of $5.1 billion.

The main growth came from the desktop printers costing under $5,000. As this chart via Engineering.com shows, the desktop sector has seen phenomenal growth in the last few years.

Click to enlarge

3D Systems via the Cube and Stratasys via MakerBot both missed the growth opportunity with printers that were undercut by Asian manufacturers sending both back to focus more on the industrial sector. The biggest problem though is that these smaller printers are creeping into the needs for manufacturing and industrial applications.

Back To Current Reality

The current reality is despite an industry with fast growth, 3D Systems saw Q2 revenues decline by 7% and missed analyst estimates by nearly $3 million. The revenue drivers remain mixed with the key printers and manufacturing services segments down huge in the quarter.

Click to enlarge

Source: 3D Systems Q216 presentation

The company beat EPS estimates by a large amount which is what sent the stock up 18% on the day. The gains though came from cost controls and the management team previously at HP spent the majority of the earnings call discussing operating expenses. 3D Systems isn't going to win this competitive market with quarterly R&D expenses of only $20 million.

The other question investors convinced of a rebound in the sector have to wonder is why choose 3D Systems as the vehicle. After the big gain on Wednesday, 3D Systems trades at a P/S valuation multiple nearly double that of Stratasys. As well, the revenue projections generally favor Stratasys.

DDD PS Ratio (Forward 1y) Chart

DDD PS Ratio (Forward 1y) data by YCharts


With a market value of only $1.6 billion even after the big gains, 3D Systems is still a reasonable valuation. Many questions remain regarding the unproven management team and a big focus on cost control when the market is still expanding. Ultimately though, the stock doesn't offer the best value in the sector and limited reasons exist supporting 3D Systems as the best vehicle for playing a rebound in the group.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.