3D printing stalwart 3D Systems (NYSE:DDD) has dropped 35% this year after issuing a disastrous outlook in February. Investors are spooked by the fact that 3D Systems might lose its advantage in the 3D printing industry to fellow players such as Stratasys (NASDAQ:SSYS) or ExOne (NASDAQ:XONE), or even potential newcomers such as Hewlett-Packard (NYSE:HPQ). However, with shares of 3D Systems down massively this year, is the stock a buy? Let's find out.
Accelerating R&D and a rich tradition
3D Systems is aggressively investing in research and development. The company more than doubled its R&D spending in the fourth quarter from $7.8 million the prior year to $16.6 million for the December quarter. 3D Systems is rapidly increasing its sales and marketing infrastructure and talent expenditures to support its growth initiatives. The impact of these expenditures was partially reflected in the unveiling of 24 new products between Dec. 1, 2013 and Jan. 9, 2014. As a result of R&D productivity, revenue from new products rose an impressive 75% to $231 million in the previous quarter. 3D Systems also continued to expand its manufacturing capacity to accommodate increasing demand.
3D Systems plans to double its revenue over the next couple of years. However, this would come at the cost of a short-term impact on the margins. Management is focusing on accelerating the company's growth and expanding its market share. Consequently, management is prioritizing initiatives and investments that are central to its plans to double its revenue over the next couple of years, ahead of short-term earnings, in order to deliver the full potential of its business model.
3D Systems has illustrated its leadership through innovation and technology. It invented 3D printing with its stereolithography (SLA) printer and was the first to commercialize it in 1989. 3D Systems also invented Selective Laser Sintering (SLS) printing and commercialized it in 1992. Further, 3D Systems invented the ColorJet-Printing (CJP) class of 3D printers along with Multi-Jet-Printing (MJP) printers. Today, its comprehensive range of 3D printers is the industry's benchmark for production-grade manufacturing in aerospace, automotive, patient-specific medical device, and a variety of consumer, electronic, and fashion accessories.
Due to its strong and diversified portfolio, 3D Systems saw robust demand for professional and advanced manufacturing printers, an increase in materials growth rate, and total unit sales that more than tripled last year's units. Also, demand for Direct Metal 3D Printers is rising. Major OEMs and service providers are investing in ProX Direct Metal printers because of their capability to produce the most demanding industrial-grade precision metal parts.
Inorganic growth is certainly helping
Direct Metal revenue was helped by the acquisition of Phenix Systems, which 3D Systems had acquired in July last year. This shows the adept nature of 3D Systems at buying smaller companies and integrating them successfully into its business.
3D Systems is also a domain expert in aerospace, automotive, medical device and jewelry manufacturing and believes that the acquisition of Xerox Wilsonville, combined with its Google Project Ara, places it in a solid position to benefit from 3D printing's advancement. The company has an attractive consumer portfolio available today, along with the right performance levels and price points to accelerate adoption.
Also, 3D Systems expects the acquisition of Village Plastics to accelerate its consumer material development and margins. It expects the acquisitions of Gentle Giant and Digital Playspace to enhance its brand publishing capabilities and the attractiveness of its consumer and retail platform. Moreover, the joint development agreement with Hershey is designed to explore and develop fab grade manufacturing platforms, as well as prosumer and consumer 3D printers for edible chocolates and sweets.
Analyst targets and targeted acquisitions
It now seems that 3D Systems' shares have run out of fuel. The stock is down nearly 38% from its all-time high, thus, this is an ideal entry point for opportunistic investors. The company's prospects look strong and it has already taken the lead in the consumer segment. The acquisition of Village Plastics and Gentle Giant, along with the deal with Hershey's, will benefit the company going forward.
Moving on to the industrial side of the business, 3D Systems is facing intense competition from Stratasys and ExOne. Both these companies focus more on the industrial side of 3D printing and are currently enjoying stronger pricing and better margins than 3D Systems. However, 3D Systems will improve as it integrates its 40+ M&As into its core business. As I explained in one of my previous articles, each of 3D Systems' M&A serve a different purpose, thereby giving it a diverse range of products. In the long run, this will give it a competitive edge over its peers.
In addition, multiple firms have upgraded their 3D Systems' rating. Credit Suisse recently upgraded its price target to $79, while the price target at Piper Jaffray was revised upwards from $69 to $82.
What should investors do?
With the 3D printing market still in a nascent phase, 3D Systems has got a long runway ahead of it to propel its growth. The company is smartly strengthening its position in the industry with numerous acquisitions and is also focusing on research and development. Hence, investors should consider utilizing the recent drop to buy shares of 3D Systems as its earnings are slated to grow at a CAGR of 23% over the next five years, and there might not be many opportunities in the future to buy the shares at around $60.
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.