Can 3D Systems Sustain This Revenue Growth?

| About: 3D Systems (DDD)

3D Systems (DDD) recently reported its third quarter earnings, and the company posted strong top line growth. 3D Systems has been the recipient of positive investor sentiments, which resulted in its stock price appreciating 88% YTD. Although the company currently operates in a low competitive environment, this situation is expected to change in the future due to the rise of small players and entry of new companies in the industry.

Positive results and bright future

3D Systems reported a strong third quarter revenue growth of 50% year-over-year due to strong 3D printer sales. The company's printers and other products division reported 76% year-over-year revenue growth. Due to its top line growth, the company increased its revenue guidance for the current fiscal year from $485 million-$510 million to $500 million-$530 million. Despite this top line growth, the company reduced its EPS guidance from $1.05-$1.20 to $0.93-$1.03.

As per Avi Reichental, 3D Systems' President and Chief Executive Officer, "The company continued to increase its R&D and marketing expenditures, making investments in support of its near term opportunities and expanding product portfolio. For the third quarter in a row, the company expanded its manufacturing capacity to accommodate increasing demand for its products and services. We are accelerating developments of key products, channels and technologies to capture a broader share of upstream production applications and downstream consumer opportunities"

This is an important step towards capitalizing on the 3D printing market growth. As per Gartner's recent report, end user combined spending on 3D printers is expected to increase 43% year-over-year in 2013 and 62% year-over-year in 2014. Worldwide shipments of 3D printers priced less than $100,000 are expected to double in 2015, from the current year's estimate of 56,507 units.

As mentioned in our previous article, 3D Systems' printers cater to all three market segments i.e. prototyping, direct digital manufacturing, and consumer. Therefore, the company is well positioned to benefit from the increased consumer spending on 3D printers.

3D printer prices vary according to customer usage; industrial manufacturing printers have an average price of $75,000 per unit, while consumer printers used for personal use are priced from $1,000 to $3,000. The consumer segment is the fastest growing segment, and the current Makers movement is driving the demand of these products. 3D Systems' consumer solution revenue has grown approximately 309% year-over-year in the third quarter, while its revenue contribution has increased to 9.9% in the third quarter 2013 from 3.7% a year earlier. Makers movement is the trend where consumers employ "do it yourself" techniques and processes to create unique objects with the help of 3D printers. Although the revenue contribution of 3D Systems' consumer printers is low compared to its industrial printers, looking at the market growth, this segment's revenue is expected to provide significant contribution towards company's top line growth.

3D Systems receives tough competition from Makerbot, which is a leader in desktop 3D printers. It's famous among households, entrepreneurs, small businesses, and designers. Stratasys (SSYS) has now acquired Makerbot, which is one of leading providers of industrial 3D printers. Makerbot has a wide range of products from its Replicator printers to its 3D scanner Digitizer, which are creating strong top line growth. Stratasys reported that Makerbot's first half revenue has increased 360% year-over-year, and due to the popularity of Makerbot's products among consumers, this revenue growth will sustain in the future. Stratasys will report its third quarter result on November 7 this year, and due to strong presence in industrial printers and the acquisition of Makerbot, Stratasys is set to post strong quarter results.

Makerbot is a big threat for 3D Systems in the consumer segment, but 3D Systems has been investing heavily in R&D and in its acquisition strategy to expand its product offering. As per its recent third quarter SEC filings, up to now the company has completed seven acquisitions in 2013. These acquisitions have increased the company's target market due to its increased product offering, thereby contributing to revenue growth.

Is 3D printing still an uncompetitive environment?

3D Systems and Stratasys control the majority of the market. There are only four publicly traded companies in U.S. that operate in the 3D printing industry and two of them are listed this year. These are Stratasys, ExOne (XONE), Voxeljet (VJET), and 3D Systems. ExOne and Voxeljet have limited presence in the overall 3D printing market, but both companies are benefiting from the positive investor sentiments towards 3D printing's growth potential. ExOne's share price has almost doubled since its IPO in February, while Voxeljet received a positive response during its recent IPO. Both companies cater to a niche segment of 3D printers and supply products used by industries for addictive manufacturing, or 3D Printing. Though Voxeljet and ExOne might be smaller in terms of revenue compared to Stratasys and 3D Systems, both companies are seeing demand growth of their products due to the rise in the number of industries adopting 3D printing.

The 3D printing industry will have a new player by 2014; Hewlett-Packard (HPQ) is planning to enter the 3D printing market with the launch of its first 3D printer. HP's CEO Meg Whitman announced that due to growth potential in the 3D printing market, HP will soon have its own 3D printer, which is currently under development in its R&D labs. HP is the leader in 2D printers, and this transition into 3D printers will extend its printing solution offerings. HP is looking for growth areas for its turnaround to offset its declining revenue from weak PC sales. HP has strong financial resources, which will help the company expand its footprint in 3D printing. Therefore, as the market becomes more competitive, users will benefit from a fall in the prices of 3D printers. Although the company has not given any specific detail regarding the type of 3D printer it is developing, the company has a strong R&D base, which can deliver a competitive product in the market. It is too early to predict HP's dominance in 3D printers, but this announcement will be a potential threat to the market dominance of 3D Systems and Stratasys.


3D Systems is among the favorite picks in the 3D printing industry due to its strong product portfolio, which will capitalize on the current market growth opportunity. The company is currently trading at a 12 months trailing P/E of 137.48, and its forward P/E for next fiscal year is expected to fall to 45.44. Therefore, investors can expect growth in the company's earnings due to its strong top line growth.

Although the market will become more competitive after the entry of HP, the company is investing heavily to sustain this growth in the long run. 3D Systems' current quarter results mirror the strong market growth fundamentals that the company is betting on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article

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