3D Systems: The Next Big Thing or Temporary Bubble?
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
3D Systems (NYSE: DDD) has been hyped to investors for some time as a company into the next big thing – 3D printing technology for manufacturing applications. In the 1990’s a host of companies were touted as the next big thing known then as the Dot.Com Revolution. In reality, the Dot.Com era did turn into the next big thing but left the battered and bloodied bones of thousands of investors along the way. Stock prices got ahead of themselves.
3D Systems is up an astounding 172% year-over-year, but dropped 6% for the month of November capped off by an 8.7% drop in the final week of trading while still hitting a new 52 Week High during the week. This stock is still hot.
The company’s Oct. 25 Earnings Release showed $0.32 EPS for the quarter, with revenue up 57.4% year-over-year. The Earnings per Share beat analyst consensus estimates of $0.27. Since mid-November analysts at JPMorgan, Piper Jaffray, and Canaccord Genuity, all raised their price targets on 3D Systems.
In the summer of 2012 research firm Global Industry Analyst published 3D Printing: A Global Strategic Business Report. The report concludes the global market will reach $2.99 billion by 2018. 3D printing has earned the accolade of a game-changing technology. The technology is complex, combining elements of computer-aided design software with a layering technology that builds three-dimensional physical products from the digital model. The current technology is limited by the kind of materials that can be used in production. In addition, the technology cannot yet handle products made from a combination of different materials.
However, 3D printing is already an alternative to traditional mass manufacturing for many applications. Manufacture of replacement parts for industries of all kinds offers huge market potential. The question for impatient investors is how fast will the technology evolve; and for others the ultimate question is which 3D printing manufacturer will emerge the winner.
If technological innovation provides a clue, give an edge to 3D Systems. The 2012 Consumer Electronics Show in Las Vegas saw the debut of the Cube 3D, a consumer friendly 3D printer from 3D Systems. The printer retails for around $1,300 but can only make objects from plastic.
3D Systems vs. the Rest
Right now there is only one other major player trading on readily accessible US markets – Stratasys Inc. (NASDAQ: SSYS). The table below compares the main investment metrics of the two largest U.S. players:
One great concern most investors have about these stocks is their valuation. Although both are considered growth stocks and both may be currently overvalued, 3D Systems appears superior going forward. A forward P/E of 27.48 is relatively modest for a growth stock, while the 40.96 for Stratasys is still a bit too rich for many investors. 3D Systems takes the prize in every other measure except Debt to Equity Ratio. 3D’s impressive 5-year EPS growth performance is way ahead of its competitor. Stratasys experiences an annualized earnings growth of only 12%, whereas 3D Systems almost doubled its earnings every year.
Once we dig deeper into financials, it is observed that 3D systems was able to double its revenues over the last 5 years. Its gross profit also followed a similar trend. The cash flow from operations reached to $50 million, but the company spent almost $200 million on acquisitions. Nevertheless, thanks to the issuance of debt and common stock, 3D systems had about $184 million of cash by the end of last quarter. While the net profit margin is only 11%, the gross margin is about 50%. This is similar to the gross margin and net profit margin enjoyed by Stratasys. However, 3D Systems' return on equity ratio of 11% outperforms the ROE of 9% enjoyed by Stratasys. Thus 3D systems has a larger equity value and utilizes this equity better than its closest competitor.
The impact of 3D printing on manufacturing in the future is undeniable. The forward-looking numbers for DDD make the stock a candidate for buying on the dips. Dollar cost averaging into the shares is another strategy to consider. It is quite hard to compare 3D systems with Stratasys, as they support very close metrics, but the company has some advantages over rival Stratasys based on earnings growth, price to book ratio, and return on equity.
Both companies have played the acquisition game to expand, but 3D Systems has a more consumer-oriented product line. Perhaps more significant is the company’s work on materials development. It recently announced a new material called VisiJet X that rivals the performance of ABS plastic. 3D Systems already gets substantial revenues from printer materials and service than from printers. It is also well-poised to capitalize on the classic “razor-blade” business model.
So, back to the title. Are we observing a bubble in 3D printing? Well, I don't think so. While the valuations look rich, I think these stocks can be good buys on market weaknesses. The demand for 3D printing gadgets is strong and these two companies are among the front runners. That alone makes them compelling takeover candidates. Traditional printing companies will be very much interested in high-tech printing solutions provided by such companies.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short JAN 2014 $55.00 calls on 3D Systems and short JAN 2014 $30.00 puts 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!