3D Systems Corporation Stock Isn't Worth Buying Yet

Remember when 3D printing was supposed to be the next big thing?

That never happened. And you don’t need to look any further than the stock chart of 3D Systems Corporation (NYSE:DDD) over the past several years to see just how all those big promises turned into dust. DDD stock has tumbled from nearly $100 in 2013 to below $10 today.

Unfortunately, it doesn’t look like things are going to turn around any time soon for 3D Systems stock.

The company just reported first quarter numbers, and they were wildly mediocre. It was a revenue beat accompanied by an earnings miss. Printer sales jumped 24% higher, which is great, but there has been a lot of quarter-to-quarter volatility in that number depending on product launches. Consequently, investors aren’t putting much stock into that strong printer growth.

What they are putting stock into, however, is the mild overall revenue growth rate of 6%, which has been consistent for the past several years. They are also concerned about the fact that gross margins are crumbling thanks to a shift to lower-priced products.

I don’t see a bounce-back happening any time soon. Under rosy growth assumptions, DDD stock is worth somewhere around $8. Thus, at around $10, there isn’t much to like about the stock’s potential upside.

Here’s a deeper look.

3D Systems Will Remain a Slow-Growth Story

3D printing was supposed to be the next big thing in consumer technology. A few years back, everyone was talking about how technology had progressed to a point where everyone could own and use 3D printers in their homes.

But that hasn’t happened for several reasons. 3D printers cost too much, and they require far too much knowledge to operate and effort to maintain. Plus, the applications just don’t really have mass appeal to consumers.

When the hopes of mass consumer adoption faded, DDD stock dropped hard. From the end of 2015 to the end of 2013, DDD stock fell from $100 to under $10.

The stock, though, has been kept afloat in that $10 range over the past several years due to some exciting things happening on the industrial 3D printing side. Big industries like aerospace and healthcare have found some cool ways to use 3D printing to improve supply chain productivity and create medical devices.

While this may sound like a big growth market, it simply isn’t. Over the past several years, DDD has pushed hard into this area. During this big push, revenue growth has remained steadfastly around 6%. This past quarter, revenue was still at 6%, and that is with 24% printer revenue growth.

Overall, then, the industrial market is driving mild, 6%-per-year revenue growth at 3D Systems. That is healthy, but it isn’t anything to write home about.

3D Systems Stock Is Priced With Too Much Optimism

At current levels, it seems like 3D Systems stock is priced as if industrial market adoption were going to accelerate upward or if consumer market adoption were about to go mainstream.

Neither of those things are going to happen.

Instead, over the next five years, revenue growth will remain around 6% per year. Gross margins, which are currently struggling to maintain a high 40s level, could move toward 50% as new, higher-margin products enter the fold.

The adjusted operating expense rate, which has hovered in the low to mid-40s historically, could drop to 40% as revenue growth drives healthy operating leverage. Consequently, operating margins should trend toward 10%.

That combination implies revenues of $864.6 million and operating profits of $86.4 million in five years. If you take out $2 million for net interest expense and 21% for taxes and divide by 110 million shares, that equates to around $0.61 in earnings per share.

A market-average growth stock multiple of 20-times forward earnings on $0.61 implies a four-year forward price target of just over $12. Discounted back by 10% per year, that equates to a present value of just over $8.