This Is a Top 10 Stock
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The core of any investment portfolio should contain great businesses. As this blog series illustrates, it is important to identify these businesses across a wide range of industries and risk profiles in order to create a truly diverse market-beating portfolio.
While steady, conservatively run businesses such as Coca Cola and Costco are important foundations for any portfolio, so too are the occasional “rule breaking” companies that are poised to create multibagger returns over the long term. With this backdrop, let’s take a look at today’s top 10 stock: 3D Systems (NYSE: DDD).
Tremendous growth opportunity
3D Systems is a leading player in the emerging 3D printing industry. While the industry itself has been around for a while, demand has recently begun to explode as improvements in 3D printing technology have expanded the potential applications. The appeal of on-demand production should be evident, especially in situations where low volume production is required such as prototyping, generating spare parts, and creating customized products.
Today, 3D Systems sells printers, materials, and services to a wide range of customers that include aerospace companies such as Northrop Grumman and United Technologies, car companies including Ford and GM, appliance makers such as Black and Decker and Electrolux, and even toy companies like Hasbro and Mattel. While this is already a diverse client base and includes a number of Fortune 500 companies, the growth potential is just starting to unfold as 3D Systems makes substantial investments to expand applications in health care, education, and consumer segments. 3D Systems sees a future where "manufacturing with a mouse click" will lead to the on-demand production of everything from prosthetics to the latest children’s toy.
While this may sound like something seen in an episode of Star Trek, 3D Systems has in fact begun its push to enter the consumer market. The Cube and CubeX have gained significant attention at this year’s Consumer Electronics Show in Las Vegas, in part because the starting price point of $1,299 for a Cube printer is approaching the realm of possibility for a growing portion of the consumer market.
If this still seems like a futuristic dream, consider 3D Systems' actual results: during the first nine months of 2012, 3D Systems' revenue grew 57% and EPS grew 64% while both gross margin and net margin continue to expand. Here is a look at how 3D Systems has already turned the market opportunity into remarkable growth.
The market expects this growth in the 3D printing market to continue, tripling in size to around $5 billion over the next five years.
Taking the lead in a fragmented industry
As the 3D printing market evolves from its prototyping and CAD origins, a fragmented field of competitors operating in specialized niches has begun to consolidate. 3D Systems and Stratasys (NASDAQ: SSYS) have emerged as pure-play 3D printing leaders, while software solution providers such as Dassault Systèmes and Autodesk continue to participate in the field of 3D design as an extension of their core businesses.
3D Systems in particular has stood out during the consolidation of this industry with a long track record of successful acquisitions; in fact, of the 57% revenue growth noted above, 24% of the growth was organic while the remainder relates to acquisitions. The recent acquisitions by 3D Systems have provided a range of benefits, including the expansion of its product offerings, acquisition of personnel with significant industry expertise, and a solid boost to both the top and bottom lines. Through acquisitions and internal development, 3D Systems has assembled an array of approximately 1,200 patents relating to 3D printing.
Valuation and other investment considerations
While the recent track record of growth and overall market opportunity are plenty to get excited about, there is certainly more to an investment decision than the growth thesis alone. As illustrated below, both 3D Systems and Stratasys have leveraged that growth thesis to crush the market over the past five years.
In just the past year, 3D Systems has soared over 275% to reach an all-time high of $61.82 earlier this week. While 3D Systems has had enough growth to justify its shares outperforming the market by a wide margin, it is important to note that the recent attention resulting from analyst upgrades and CES demonstrations has left the stock trading at some pretty lofty multiples, including a P/E of 85, P/S of 10.7 and a free cash flow yield of just 1.5%.
The current valuation makes 3D Systems’ shares more risky than any of the other stocks featured in this “top 10” series; as a result, it is strongly advised that potential investors wait for better value points, invest gradually, or use another method of accumulating shares other than going “all in” given that there will likely be volatility and the potential for more attractive entry prices in the future.
What does the future hold?
While 3D Systems is still a long way from creating the replicator featured on Star Trek, the company has amazing growth potential. This growth will come both organically and through acquisition and will focus on increasing the number of addressable markets for 3D printers as well as increasing the market penetration of its products within these markets. The current stock price may be prone to volatility and short term swings, but, looking out five years and beyond, most valuation models yield higher share prices than 3D Systems’ current price near $60.
Additionally, there is an often under-appreciated potential outcome for 3D Systems that would lead to further gains for investors: acquisition. Recognizing the potential for creating prototypes and low-volume, highly customized parts ranging from spare parts for aircraft to components of wind turbines, industrial conglomerate General Electric is a potential suitor that could make a lot of sense.
If the consumer market begins to show tangible signs that it could evolve into a huge market, it is possible to see e-commerce giant Amazon.com (NASDAQ: AMZN) place a bid. Sound ridiculous? Amazon just completed a $775 million acquisition of Kiva Systems to obtain robotic technology focused on warehouse efficiency. With a constant evolution towards same day delivery, would on demand delivery from Amazon.com straight to an in-home printer really be that far of a stretch?
Both of these examples are speculation at this point, but the fact remains that the broad opportunities that make 3D Systems a compelling stock may also make the company a compelling acquisition target in the future.
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BrewCrewFool owns shares of 3D Systems and Amazon.com. The Motley Fool recommends 3D Systems, Amazon.com, and Stratasys. The Motley Fool owns shares of 3D Systems, Amazon.com, General Electric Company, and Stratasys and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!