Since the beginning of 2022, 3D Systems (NYSE:DDD) has shed over 50% of its value after it became clear that they are likely to underperform their initial expectations for the year and are now projected to report lower revenues for the year relative to 2021. Since they've announced their refocusing in 2020, they've had a decent year in 2021 with a return to sales growth and a steady stream of new contracts but due to some inflationary headwinds and strategic refocusing taking a little longer than expected, they're set to underperform.
However, since I believe that the company's refocusing is proving fruitful in the long run, as in after this upcoming year, I expect them to outperform current expectations and thus current valuation is low - affording them the title of likely-to-outperform and making them a solid investment for the coming 2-3 years.
The company reported its highest-ever revenue figures back in 2019 when it reported just over $690 million after reporting stagnant or declining sales for the previous 5 years. It has since been reporting lower revenue figures each year, and most analysts expected that trend to continue for a few more.
But the company has been working on regrouping and refocusing their efforts into their 2 most profitable business segments - healthcare and industrial. They announced this refocusing in the middle of 2020 and since then, have been gaining a steady stream of contracts (announcement linked above).
Their aim at reducing operating costs by about $100 million annually has proven fruitful for lowering the costs of their contracts and gaining more revenue. They've done this by lowering overall expenses as well as laying off a significant portion of their employees, which has streamlined savings even as it took a roughly $25 million hit in severance. This means that although profitability is a few years away, the company is now expected to report growth in revenue after years of stagnation or outright declines.
The company is reliant on new contracts with major manufacturers in the healthcare and industrials segment and previously there was a question if they'll be able to adequately compete for these contracts due to financial constraints. I believe this isn't going to be the case moving forward.
The implementation and execution of these contracts is possible due to the higher degree of liquidity the company has experienced in recent years as they save on operating costs and raise capital and debt. The company holds just shy of $400 million in cold hard cash and equivalents and has worked on investing this cash to offset interest expense on their newly taken on long term debt. This debt was taken on during the low interest rate era and the fixed rate nature of it is set to mitigate the majority of any potential increase due to higher interest rates.
The company holds over $350 million in short term investments, which brings their total cash and short term investments to just shy of $745 million.
As I mentioned earlier, the company has already reported an increase in revenues for 2021 and although analysts currently expect the company to report a rather stagnant 2022, which is part of what lead to the 50% decline in share price, it is expected to report higher revenue numbers in the 2 years that follow. Here are those figures, based on analyst expectations:
|Revenue||$616 million||$595 million||$660 million||$720 million|
What's driving this revenue increase is the growth we're seeing in the healthcare and industrial fields when it comes to the company's core business - 3D printing.
In the healthcare field, the 3D medical devices market is expected to report a CAGR of 17.5% through 2028, growing from just over $2 billion to just shy of $6.6 billion, according to market research. This is where 3D Systems is expected to derive a decent chunk of its new contracts from as it refocuses to answer the demand this field is seeing with the advancements in technology.
In the industrials field, the 3D printing market is expected to grow at a faster 24.3% CAGR through 2029, growing from around $15 billion to over $89 billion, driven by higher demand across multiple segments.
As 3D Systems refocuses their efforts into these fast-growing industries, I believe that they will begin to show revenue growth closer to the 15% to 20% range which the aforementioned business segments are expected to grow.
As a result, I believe that 3D Systems is highly likely to outperform their revenue expectations beginning in 2023.
Compared to the company's closest peers, like Stratasys (SSYS) and Avid Technology (AVID), the company is trading at roughly the same price to sales multiple of around 2x while all companies are expected to, more or less, grow sales at the same rate over the next 3 years, as projected by analysts:
However, as mentioned earlier, I believe that 3D Systems' leading market position will enable it to outperform these expectations while other peers may do so, but to a lesser extent. This means that even with the company being, theoretically, fairly valued at current levels, the expected outperformance means that their valuation can be significantly higher moving forward.
The primary risk for the company's growth is a looming recessionary environment, where companies which 3D Systems tends to work with and gain contracts from - may end up lowering their expenses of new projects in anticipation of lower overall revenues coming in as spending decreases.
Beyond the risk of revenue interruptions, competitive pressures do loom large over the industry as a whole while major players like the aforementioned peers as well as large companies like General Electric (GE) emerge with newer technological solutions for 3D modeling and printing problems facing the industry.
Overall, I believe that the company's brand and name recognition will help them overcome most of these risks and hurdles, but investors or potential investors should air on the side of caution and follow recession indicators like spending by big companies and other factors.
3D Systems has taken longer at implementing cost savings measures, which alongside supply chain issues and lower corporate spending in the industrials sectors, has stalled the implementation of their refocusing and regrouping plan even as new contracts continue to trickle in.
As a result of my belief that the company is likely to grow sales closer to the expected industry growth in their core operating markets, I believe that the company will outperform current expectations by as much a double, resulting in the company being a solid long-term investment.
I believe that the company will easily outperform 2023 revenue expectations and report about a 15% growth rate, followed by further acceleration through 2025. This means that the company's share price has the potential to be worth about 15% more each year that this strategy proves fruitful, which is quite higher than current expectations which lead the company's share price to decline roughly 50% since the beginning of the year.
As a result of these factors, I am bullish on 3D Systems' medium to long term prospects.
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Disclosure: I/we have a beneficial long position in the shares of DDD, GE either through stock ownership, options, or other derivatives. 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.
Additional disclosure: Opinion, not investment advice.