by Tom Taulli | March 4, 2014 9:56 am
Last Friday, 3D Systems (DDD) reported its results for the fourth quarter, and they were mostly in line with expectations. As a result, not much happened with the stock price.
Revenues in Q4 came to $154.8 million — up 52% on a year-over-year (YOY) basis — and earnings per share came in at 19 cents. 3D Systems also affirmed its full-year guidance of revenues of $680 million to $720 million and earnings of 73 to 85 cents per share.
However, keep in mind that DDD stock issued an earnings warning back in January, so Wall Street had already factored in slower growth. As a result, DDD stock has gone from a 52-week high of $97.28 down to $75.72. And yes, other 3D printing stocks have also taken hits.
So might this be an opportunity? Or should investors wait before buying DDD stock? To see, here’s a look at the pros and cons:
3D printing leader: Think 3D printing is new? Think again. 3D Systems pioneered the business about 30 years ago with the invention of stereolithography. Of course, the company continued to innovate as it introduced laser sintering, multi-jet printing, film transfer imaging, color jet printing, direct metal sintering and plastic jet printing. 3D Systems has also built sophisticated software technologies, which leverage the cloud and CAD systems. The result is that the company has produced a variety of industry standards, which have helped keep the firm at the forefront. Keep in mind that the company has seen adoption of its technologies in diverse industries like aerospace, defense, transportation and healthcare.
Next-generation manufacturing. The traditional factory floor is quickly fading away. In its place are 3D printing facilities, which can create virtually anything, such as medical devices, airplanes, food, guns, human limbs and so. All this can be done using rapid design, production of custom parts and low levels of inventory. As should be no surprise, the market potential for 3D printing stocks is enormous. According to 3D Systems, the market is expected to go from $2.2 billion in 2012 to $10.8 billion by 2021.
R&D: Last year, 3D Systems ramped up its expenditures by 87% to $43.5 million. And so far, the efforts have been paying off. During the period, the company has announced or launched 39 new products. But DDD has also been smart with its partnerships. Some of its ventures include deals with biggies like Intel (INTC), Google (GOOG) and Hasbro (HAS). Oh, and DDD has been focused on acquisitions. In fact, the company averages a deal every month!
Competition: DDD must fight against tough operators like Stratasys (SSYS), ExOne (XONE) and Voxeljet (VJET). The company is also pouring large amounts into R&D and expanding aggressively with its marketing and salesforce. In other words, it is getting tougher to stand out. At the same time, venture capitalists are investing substantial amounts into 3D printing startups. These new players will likely be at an advantage since they do not have to support legacy systems and can instead use cutting-edge technologies for their products.
Valuation: During the past two years, DDD stock has clocked a return of more than 9X. But of course, this means that the valuation is at nose-bleed levels. The forward price-to-earnings ratio is 62. But then again, the rest of the 3D printing stocks are also at hefty valuations. For example, SSYS’s multiple is 55 and VJET’s is a massive 509!
Dealmaking. While DDD has a good record with acquisitions, the transactions have still been relatively small. But this could add to the complexity. Let’s face it, it can be extremely tough to integrate a large number of companies. The distractions can be a big problem. Besides, the valuations in the industry pose a problem too. Basically, even small operators can fetch a large valuation — which means the hurdle rate can be significant for success.
Even though growth has decelerated a bit, DDD’s long-term prospects look bright. No doubt, it is critical that the company has focused on R&D. But the partnerships and acquisitions will also be key. All in all, in the race to dominate the 3D printing market, 3D Systems is in a good spot.
It’s true that the valuation of DDD stock is far from cheap. But in a disruptive market, this is to be expected. Besides, the product launches should ramp the revenues over the next couple years. Keep in mind that DDD thinks it will hit $1 billion in revenues by 2015.
So should you buy DDD stock? Yes, if you want to tap into the 3D printing revolution, the company has a strong customer footprint and is leading the way with its technology.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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