How Much Higher Can This Tech Stock Really Go?

Ben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When evaluating a company it is essential to look at the business model and determine whether or not the fundamentals are there. Putting in the right amount of research and analysis can lead to successful stock picking and eventually creating a portfolio that can outperform any major index. A lot of investors who didn't jump on Apple at the beginning of 2012 were kicking themselves because of the massive gains they could have reaped in the first part of the year. But if they did a little more homework they could have found a diamond in the rough, a company that outperformed Apple and is still growing.

The company I want to add to everyone’s portfolio had a 267% return over this past year, is very volatile and is in the 3D printing business. I’m of course talking about 3D Systems (NYSE: DDD), a company that specializes in 3D printers that convert data input from CAD software and produce tangible objects.

A leading innovator in a self-labeled disruptive technology and a great stock performance are all here for this company, but is it backed up by the financials? Over the past year 3D Systems has posted improving margins across the board. They showed a gross margin of 50% which topples the industry norm of 30%. On top of that their operating margins are at 19%, almost twice that of the industry's 8%.  

As the company continues to grow and consolidate 3D printing under one logo, they must continue with their acquisitions and improve their margins even more. Also since 2007 revenue has improved each quarter at a 57% rate; this is very impressive when compared to the industry's 12% growth rate. 

Finally, when we look at the company's free cash flow we can see over the long term its true earnings power. For 3D systems free cash flow has increased dramatically over the years; starting in 2009 at a negative $54,000 all the way up in 2012 to $22.28 million. This seems to suggest they have strong earnings and if this trend continues, 3D systems and its shareholders can only stand to benefit.

Can I Find Something Better and Cheaper?

Whenever I see a stock that has performed as well as 3D has over the year I want to analyze whether they can keep growing and if another company in a similar industry is poised to outperform them. Stratasys (NASDAQ: SSYS) manufactures and sells 3D printers and closely matches the returns of 3D systems.     

  DDD SSYS
Market Cap 3.48B 1.86B
P/E 89.49 100.46
P/S 10.43 9.56
P/B 8.06 8.80

Looking at the valuation metrics you can see that Stratasys is more expensive with a 100.46x P/E and a 8.80x P/B, whereas 3D Systems has a 89.49x P/E and a 8.06x P/B; all the metrics are better except for Price/Sales. The market is pricing Stratasys more cheaply in terms of its sales. This could possibly reflect on the market's expectations for the company's future growth potential. Keep in mind, though, their merger with Objet gives them added size to compete head on with 3D.

1 Year Performance

 

On top of the better valuation, 3D Systems has outperformed Stratasys over the past year by a substantial margin.

Is There a Moat?

Both companies have taken steps to protect their innovative technologies and keep other competitors at bay. 3D systems and Stratasys attempt to do this by buying up smaller companies and setting competitive prices to discipline the market. 3D Systems has gone even further by issuing numerous patents on their materials which in turn allows them to create high-end printers as well as low-end printers for personal use.

Bottom Line

Over the past year both stocks have performed well regardless of market conditions. Both have excellent prospects moving forward; Stratasys's recent merge with Objet will making it the largest 3D printer company. This merger allows them to develop printers that are faster, have finer detail, and smoother surfaces. 3D Systems just keeps chugging along as they recently acquired Geomagic allowing them access to modeling and scanning software. Both stocks are making headlines for all the right reasons and given their attractive valuations either stock is a good play moving forward.


Fool Blogger Ben Kovalick does not own shares in any of the companies mentioned in this entry. The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems 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!

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