3D Systems Continues To Use Its Stock As Expensive Currency To Make Acquisitions

| About: 3D Systems (DDD)
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Shares of 3D Systems Corporation (DDD) started 2013 on a strong note. Shares of the three-dimensional content-to-print solutions company rose 10.3% so far this year after the company announced the acquisition of Geomagic.

The Deal

3D Systems Corporation announced that it has agreed to acquire Geomagic, a leading provider of 3D authoring solutions including design, sculpt and scan software tools used to create 3D content.

Combined, 3D Systems and Geomagic have a stronger portfolio in the 3D platform and industry. The deal adds complementary products and technology and boost the global marketing coverage. CEO Abe Reichental commented on the deal:

Geomagic represents the perfect strategic fit for us, and we will be thrilled to welcome 3D pioneer and Geomagic Founder Ping Fu as our Chief Strategic Officer once the deal has closed. Our complementary capabilities in product development, channel coverage and marketing combined with greater efficiencies are sure to result in more affordable and user friendly solutions that will delight our customers and could present attractive long=term shareholder value.

Both parties did not disclose any financial metrics regarding Geomagic's operating performance or a price tag of the deal. The deal is expected to be accretive to non-GAAP earnings in the full year after the completion of the transaction. The acquisition is subject to normal closing conditions, including regulatory approval, and is expected to close in the first quarter of 2013.


3D Systems Corporation ended its third quarter with $183.9 million in cash and equivalents. The company operates with $131.2 million in short and long term debt, for a net cash position of roughly $52 million.

For the first nine months of 2012, 3D Systems generated revenues of $252.1 million. The company net earned $28.0 million for the period, or $0.52 per diluted share. The company is on track to generate annual revenues of roughly $350 million, on which it could earn around $40 million.

The market currently values 3D Systems at $3.36 billion, which values operating assets around $3.3 billion. This values the firm's operating assets at roughly 9.5 times annual revenues and roughly 80 times annual earnings. 3D Systems does not pay a dividend at the moment.

Some Historical Perspective

Shares of 3D Systems have seen a great year in 2012, amidst the hype about 3D solutions. Shares steadily rose throughout the year from $16 in January to the 50s in December. After the rally in the first days of 2013, shares are exchanging hands at $59 per share.

Between 2009 and 2012, 3D Systems increased its annual revenues from $113 million to an estimated $350 million this year. The company expanded its profitability from a break-even level to an expected $40 million this year.

Investment Thesis

Despite the lack of information, investors in 3D Systems applaud the deal with Geomagic, sending shares to fresh all time highs. They have all the reasons to do so, because the company's string of acquisitions over the past years has driven topline growth. Over the past years, the company spent hundreds of millions on acquisitions, including the purchase of Z Corp in 2012 for approximately $135 million.

In the first nine months of 2012 alone, 3D Systems raised $220 million by issuing more stock in order to finance this acquisition-driven growth. As shares kept rising, the company continued to issue more stock, increasing the total number of shares outstanding by roughly 10% over the past year alone.

As such, acquisitions enable 3D Systems to report higher growth, which propels the share price even higher. The company uses this to issue more shares at elevated prices in order to make even more acquisitions. This makes the company's operating performance directly tied to the share price performance, as a setback in the share price automatically reduces the capability to acquire.

Between 2000 and 2009, the company consolidated total revenues just North of $100 million. Revenues started exploding with the acquisition spree started in 2009. An excellent article from SeekingAlpha colleague Douglas W. House digs deeper in the acquisition strategy and the firm's questionable way of reporting organic growth.

The sky-high valuation, the strong recent share price performance and questionable growth figures resulting from the acquisition strategy are reasons enough to stay on the sidelines. While the long term prospects for the 3D industry remain good, the valuation has gone too far ahead.

At the same time, initiating a short position is difficult as well. The timing of a short position is key, given that the market can stay "irrational" for a longer time than you can stay solvent. For me, the momentum at the moment is too strong to initiate a short position at this point in time.

Disclosure: I 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.