3D Systems (DDD) stock tumbled Tuesday after the 3D printing company’s quarterly results didn’t do enough to support its sky-high multiple.
But that’s just the latest setback for 3D Systems and 3D printing companies in general, which are having an awful 2014.
3D printing companies kicked off the year by cutting their growth forecasts. That’s bad enough, but the warnings came at a time when the market was slaughtering pretty much all momentum stocks. Against such a backdrop, DDD stock and the other 3D printing companies hardly stood a chance.
That’ll continue to be true as long as 3D printing companies keep serving up earnings reports like 3D Systems just did.
It wasn’t horrible by any means. It was just fine — but that’s the problem.
Earnings fell but managed to match Wall Street’s average estimate of 15 cents a share on an adjusted basis. Revenue grew 45% to 147.8 million, which beat analysts’ expectations of $145.5 million. And DDD affirmed its full-year guidance.
The thing is, 3D Systems is far too pricey to report anything but an earnings beat or a beat-and-raise quarter. Instead, all DDD reported were rising costs and falling profits. That’s a bad combination for a stock when it goes for 37 times forward earnings.
Here, then, are three key issues weighing heavily on 3D Systems stock this year:
3D Systems Problem #1: Momentum Crushed
3D printing companies got off to a bad start in 2014 when they slashed their growth outlooks. SSYS and ExOne cut estimates in January. 3D Systems followed in February.
As mentioned above, that comes in a year when the market is punishing momentum stocks such as the 3D printing companies. Dan Greenhaus, chief global strategist at BTIG, put together a list of former high-fliers like 3D Systems that are getting clubbed these days. Business Insider published the list Tuesday morning.
If nothing else, 3D Systems is in affluent company.
3D Systems Problem #2: Higher Costs
3D Systems saw quarterly revenue jump, but net income declined 17%. True, on an adjusted basis, earnings matched Street estimates, but they should have beaten. After all, revenue grew 45% to exceed projections. But too much of the bottom line was eaten up by rising costs.
Margins contracted substantially. For example, expenses for research and development grew to 12% of sales from 6% in the year-ago quarter. Selling, general and administrative expenses increased to 33% from 29% in last year’s first quarter.
Much of these cost increases stem from 3D Systems’ growth. Investing in the business to make it bigger is forecast to increase profitability later on. However, DDD has no choice but to invest in R&D because some of its primary patents are about to expire.
3D Systems Problem #3: Less Profitable Mix
3D Systems had better-than-expected top-line growth, but it wasn’t driven by the right mix of products. The company sold more lower-margin products than it wanted to.
“We are pleased that our 3D printers growth continues to surpass all other product categories, despite the fact that the resulting mix delayed anticipated expansion of our gross profit margin,” CEO Avi Reichental said in the earnings release.
Printer sales grew faster than materials sales, which weighed on gross margin. 3D printers and other products revenue increased 53%. Print materials revenue grew 41%. And services revenue rose 38%. Furthermore, organic growth — a critical measure for a company expanding so much through acquisitions — fell to 28% from 3D Systems’ own target of 34%.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.