3-D Systems: A Growing Industry

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On Monday, the fast-growing company and momentum stock 3D Systems (NYSE: DDD) traded higher by 3% following a month of profit taking. The stock has traded lower by over 20% during the last month, yet has still returned more than 135% in 2012. The reason for its large gains has been strong growth, and a belief that its 3D technology could grow even faster. The company has been acquiring other businesses at a rapid rate, including Dutch company TIM Modelmakers B.V., in an attempt to stay one step ahead of the competition. However, after such large gains and a recent pullback, is the company now priced for upside?

The 3D printing industry is a space that many believe could become the next big thing. 3D Systems has been around for a long time and has built a growth company with a strong presence in the manufacturing segment of the market, and also recently pushed into the consumer business. The company is hoping to attract customers with its innovative technology that can actually print 3D objects on a variety of materials.

The possibilities for this industry are seemingly limitless, as objects from small decorations to larger products the size of a couch are capable of being printed, depending on the size of the printer and the price that consumers and industrial companies are willing to pay. In fact, some have suggested that 3D printers could make a large impact into the department store industry, and into a number of other sectors.

Positives

3D Systems’ business has grown significantly over the last few years, and when combined with the potential of the industry and the company’s many acquisitions to grow larger, it has become one of the true momentum stocks of 2012. The company has acquired seven other businesses in the last year, increasing its total assets to from $304.59 million to $632 million year-over-year. The company has also doubled its cash position, and is expecting full-year revenue between $330 million and $360 million for 2012, compared to $230.42 million in 2011. As a result, it is easy to see why the company has increased in value by such a large degree, but is it too expensive?

Negatives

While 3D Systems has increased its cash, assets, sales, and income, it has also drastically increased its debt over the last year, from just $7.8 million to over $140 million. Yet despite this debt, it still has the cash and leverage to continue with its acquisition strategy and market its products on a large scale. However, the stock is very expensive. It trades with a P/E ratio of nearly 60 and a price/sales ratio of 6.30, which is comparable to some social media stocks. It has a forward P/E ratio of just 24.54, which isn’t too expensive considering its momentum, but it could indicate stagnant growth over the next year.

In addition to being expensive, the company also faces increased competition from companies that have the ability to expand at a faster rate. The company’s most significant competitor is Stratasys (NASDAQ: SSYS), but it is a company that trades with an even more expensive valuation and isn’t on 3D Systems’ level in terms of growth. Like all industries, there are both bulls and bears for each company, and although both are expensive I would definitely say 3D Systems wins the contest based on immediate growth, valuation, and short-term upside.

The challenging aspect to assessing the future of 3D Systems is trying to determine its real competition in the space.  The $7.5 billion company Autodesk (NASDAQ: ADSK) makes software for 3-D printing, and some believe it will try and make carve a piece out of the growing industry. This belief could very well be made a reality, due to the weakness in its stock, unsatisfied shareholders, and the amount of optimism surrounding this space.

Finally, there are three additional speculative plays. Investors have recently expressed concerns that due to the weakness in traditional printing and the potential market for 3-D printing, companies such as Hewlett-Packard, Lexmark International, and Xerox Corp could expand into the business. While I do expect that one, if not all, will eventually enter the industry, it is difficult to determine or predict when this might occur.

Conclusion

3-D Systems is building a large clientele, a diversified business, and a growing brand in this innovative space. The good news is that the potential for this space is so large that 3d Systems could easily grow for many years, and still present upside potential. The company has continued to prove me wrong time-after-time, as I had thought that following 2011 it would experience a road block of flat trading. But now I believe there is more opportunity for the company than ever before, and that it would make a great long-term investment, but maybe not a short-term play.

The key for 3D Systems to succeed will be its ability to stay one step ahead of competition, and innovate beyond the larger companies that could quickly enter the business. Fortunately, it would take at least a year to fully develop a 3-D printing product line for one of the large companies, and then perhaps another year to commercialize it. This would cost a lot of money, and would be a risk that I can’t foresee with any of the larger companies.

However, I could see a company such as HPQ acquiring 3-D Systems, and because of 3D Systems’ growth I believe it would be the best candidate for being bought out. The acquisition might seem expensive for HPQ, however HPQ is so large that it could easily acquire and commercialize with little additional costs, and most likely grow sales even faster. This is of course speculative.

As a long-term play, I am sold on the potential for 3-D printing and believe that one day soon the use of these printers will become common in households. The question is when does this occur, and which company will control the space? My answer, and best guess based on current market performance, is 3D Systems; whether it be through fundamental growth or acquisitions I believe this could be a company to change the traditional printing industry forever. 


BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems and has the following options: short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems and Stratasys. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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