3D Systems: On The Verge Of Turnaround

Summary

• 3D Systems's management is determined to make the company profitable.
• Although growth has been slow, the industry still holds a lot of potential.
• If 3D manages to achieve positive bottom line in 2020, we could see the share price triple.

Thesis Summary

3D Systems Corp. (NYSE:DDD) has come a long way down due to slow growth. However, the company is focused on achieving profitability despite this slowdown. Recent results are encouraging, and 2020 will be an inflection point for the company when the results of 5 years of new leadership could finally materialize and put 3D Systems in investors’ crosshairs once again.

Company Overview & Industry

3D Systems was one of the first companies to enter the 3D printing industry. Founded in 1986, the company operates in the business of 3D printing at an enterprise-level, providing materials as well as services and software to its clients. 3D’s clients are mainly in medical, dental, automotive, aerospace, durable goods, government, defense, technology, jewelry, electronics, education, consumer goods, energy, and other industries.

3D’s stock peaked back in 2014, reaching around $95. Since then, the company has come (down) a long way. 2015 was an inflection point with the company officially exiting the 3D “retail” segment and posting a ~$500 million net loss due to goodwill.

As of writing this article, the stock sits at $8.77, quite close to its historical low. Indeed, 3D has fallen out of favor in the eyes of investors and it is no surprise once we look at both the state of the industry and the company.

The problems with 3D Systems Corporation

In this section, we will cover the main pain points that 3D is having to deal with. These will serve to justify the decline in the stock price and will allow us to understand if and how the company can turn things around.

Slowing growth:

Source: SA

3D was in its time producing staggering growth rates, and investors expected the company to be able to sustain this. If we look at the 10-year CAGR, 3D has achieved revenue growth close to that of Alphabet Inc. (GOOG) (GOOGL). But if we zoom into the last 5 years, the story is completely different, with 3D struggling to maintain its revenue. How could this change so quickly?

The truth of the matter is, 3D was only able to maintain its high growth rates thanks to numerous acquisitions. According to Crunchbase, in its history, 3D has acquired 29 companies, the last one being NexDent in 2017. That’s a staggering number and should have been an early sign that the growth of the company was not “organic” but rather bought.

In terms of valuation, 3D was also a victim of the over-hype of both experts and investors regarding the size and growth of the 3D industry. Both the company and investors believed at one point that 3D printers would become commonplace in American households. However, as mentioned above, 3D discontinued this segment to focus on enterprise services. It is clear now that 3D printing is incredibly useful for the production of particular and specialized gear, like in the medical sector, but does not have many uses at the individual consumer level.

Low profitability:

Source: SA

The other issue hanging over 3D Systems' head is that of profitability or rather lack thereof. The company has not managed to turn a profit since the share price plummeted in 2014. Operating income has been negative every year, and while the company knows this, it hasn’t been able to rein in expenses in a significant way to increase its gross margin. SG&A and costs of services have remained quite flat in terms of % of revenue.

Can 3D systems turn things around?

The company has a lot of work to do to regain anything close to its prior valuation. To this extent, I feel there are some reasons to be somewhat optimistic in this regard. 2020 will be an important landmark for 3D which will determine the future of the company.

Technology will increase profitability

New combinations of 3D printing materials, together with improvements to existing materials, will not only enable unprecedented 3D printing applications but will also help reduce prices. We will see an emphasis on metals that is likely to grow over the next three years. Advancements in printing technologies and capabilities also will spur the development of new equipment and applications, like 3D-printed electronics.

Years ago, the possibilities of 3D technology were overstated, which led to a bubble in the 3D space. Today, however, the opposite is true. The sector is now mature and every day new applications are being discovered.

Management is on the right track

In 2014, Vyomesh Joshi took over as CEO of the company. Since then, the company has been focusing on its cost structure and cash-flow generation. 3D has managed to reduce its costs at the same level as revenue but has not achieved any significant increases in profitability. However, Joshi, in the last earnings call, points out an 8% reduction in operating expenses in the first 9 months of 2019.

Overall, the company is becoming leaner, with regular divestitures and cost reductions going on, and more emphasis being put on profitability rather than growth. Having said this, it is likely growth could take a turn for the better.

The growth outlook is improving

While overall revenues have decreased to the tune of 8%, certain breakdowns of revenue paint a more encouraging picture.

Source: 10-Q

As we can see, the company managed to achieve quarterly growth in its Materials segment. If we were to break the revenue down by sector, Healthcare and Simulations services grew by 6%. Furthermore, there is overall growth in certain regions such as EMEA, which has grown near 10% in the last nine months.

In general, while 3D printing services will not become as mainstream as it was once thought, there is certainly a niche market for the services and products 3D Systems offers. According to research by United Parcels Service Inc. (UPS), the 3D printing market will grow at a CAGR of almost 30% until 2024. The projected size of the market for 2020 is of $21 billion

Source: UPS Report

This growth in the market will be made possible as 3D printing moves into the consumer electronics market. The UPS report cites smartphones as the next landmark for 3D printing. 3D printing currently represents 0.04% of the global manufacturing market, with prototyping as the leading use today.

According to sources from the UPS report, 3D printing could eventually capture 5% of the global manufacturing capacity, which would make 3D printing a $640 billion industry.

Risks and Challenges

Moving forward, the company will have to deal with increased competition. As the 3D market becomes larger and more profitable, new companies will spring up. To this extent, it's important that 3D Systems leverages its current position to stay ahead of the curve. In order to do this, they must continue to invest in R&D so that their technology doesn't become obsolete. New competition will most likely come from overseas. It will be hard for 3D to compete in terms of costs, so the company will have to focus on giving extra value through better technology and service.

Takeaway

While the company is performing poorly at the moment, fundamentals for the industry and the business look good. The last quarterly results have shown a slight turnaround and, according to management, 2020 should bring the first positive quarterly earnings. This can be achieved if SG&A can be reduced to around 30% of revenues. This would be more in line with the industry average and competitors such as Proto Labs, Inc (PRLB).

However, my rating, for now, is neutral, but I will keep a close look at the next reports, looking for confirmation that DDD can turn things around in a significant way. Once profitability is achieved, it is just a matter of time before the share price recovers. While it would be hard to calculate a target price based on P/E, I would say the stock could easily triple if the company manages to break even.

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.