3D Systems (DDD) is having an interesting year. The company's share price started the year below $15, climbed up all the way to $45, and now it's been on a sharp decline to $35. While the company's growth story has been quite impressive, the company's P/E ratio of 61 seems to scare many investors off. Will 3D Systems find a bottom anytime soon? Is this a good entry point?
First of all, let me make clear that this is a small cap with an aggressive growth story, and one shouldn't analyze the stock like a value stock. Value stocks usually have low P/E ratios (usually below 20) and slow growth rates (Usually less than 10-15% annually) and they tend to enjoy a relatively high dividend rate (at least 2.5%). As the planned retirement age gets closer, people tend to switch and progressively allocate more of their portfolio to the value stocks than the growth stocks because the growth stocks tend to be volatile.
For those that don't know, 3D Systems produces printers that are able to reproduce 3-dimensional shapes of objects using material such as plastic. These printers are largely used by designers, architects and engineers. There is a rapidly growing market for 3D printers and more industries are figuring out ways to use these innovative tools. One main competitor of 3D Systems is Stratasys (SSYS); however, there aren't many more competitors out there, which lets these two companies take advantage of a rapidly growing market.
Recently, the company entered in Fortune's list of the 100 fastest growing companies. The company ranks number 5 in technology, number 6 in profit growth and number 12 in overall growth. This is very impressive for the company as it posted a growth rate of 242% in number of units sold in the last year. Unfortunately, there are only 2 analysts that provide earnings estimates for the company in the long run, which makes it difficult to determine how much growth the company is expected to post in the future. These analysts expect the company to earn between $1.25 and $1.33 next year. The analysts covering the company also have an average price target of $36 on the stock, which is very close to the stock's current price; however, many analysts assign a relatively low P/E to this company while ignoring its growth prospects. A company with a high growth rate should not have to worry about achieving a low P/E until the growth rate slows down significantly.
Recently, the company announced that it will sell protective cases for the iPhone 5. These cases will have a double layer, and they will be produced with the company's own 3D printers. In fact, these cases are already available in many markets including websites carrying the product. In the future, the company may sell more products produced by its printers and increase its revenues when the revenue from the sale of printers starts getting flat.
In the last 5 years, the company's average annual growth rate was 14.4% while its gross margin currently sits at 49%. The company's growth rate has been accelerating recently as its products become more visible. Until recently, most people didn't even know that 3D printers existed, and many people still don't understand the full usage of them. It is possible to use these printers to make cheap prototypes of products before producing the actual products in almost every industry. This process also saves companies a lot of money on shipping costs. A toy company that designs its products in the US and produces them in China could save a lot of time and money by simply printing a 3D version of the newest design rather than hand-producing and shipping the product from China.
If one wants to initiate a long position in this company, now could be a good time. The company's share price has been falling for a couple weeks and there is no telling how much further it will fall. The stock's price should be pretty close to bottoming for the short term. I suggest investors to start out with a small position rather than a large position in this company due to the high volatility. If the share price plunges further, taking a small initial position will allow you to purchase more shares to bring your average down. Also, those who buy this company should hold onto their shares for at least 2-3 years to see good returns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.