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Is 3D Systems a Good Buy?
Posted by: Vinay Singh (IP Logged)
Date: March 21, 2014 09:17AM
Shares of 3D Systems (DDD) have been on fire over the past year or so. Consequently, I have seen many analysts claiming that 3D Systems is a good short candidate. 3D Systems might be overvalued, but is it a good short play?
I don't think so. 3D Systems has sent short-sellers running for cover in the last few months, and I don't think that its share price will fall anytime soon. Thus, shorting 3D Systems will prove to be a very risky move. Let's see why.
Why Are Investors Shorting 3D Systems?
There are a few reasons which have led certain investors into believing that 3D Systems is a good short play. The primary reason why investors are shorting 3D Systems is because they believe it is overvalued. Many have highlighted the fact that 3D Systems is vastly overvalued, and have stated that it is a worthy short candidate. At a trailing P/E of 135, 3D Systems is quite expensive. But those betting on shorting the stock shouldn't forget that it is the only one among its peers that's reporting a profit.
Another reason which I have been reading about for a very long time is 3D Systems' mergers and acquisitions (M&A). Many analysts and authors have claimed that since 3D Systems has acquired over 40 companies in the last few years, it is difficult to accurately calculate the company's organic growth.
Lastly, certain investors seem to believe that 3D printing is largely overhyped and it will never fulfill its potential. While 3D Systems has constantly and consistently shown growth, it is extremely unlikely that 3D printing will not be successful. Though I agree with the fact that 3D printing will take few years to evolve into the next-gen technology for industrial manufacturing, it is certainly not a far-fetched idea.
Why 3D Systems Is Not a Good Short Play
Now that we have seen why investors are shorting 3D Systems, let's analyze those reasons one by one.
Shorts have been claiming that 3D Systems is overvalued and it will come down eventually. While I agree with the first bit, I don't think its price will drop considerably in the near future. Many analysts have high hopes for 3D printing and have even estimated it to triple its worth by 2018. 3D Systems, being the leader of the pack, should definitely capitalize on this growth.
The company has been working consistently to fortify its presence in the industrial as well as the consumer sector, and it is highly unlikely that it will not yield good returns in the long run. 3D Systems unveiled six new printers at the EuroMold and this indicates that it has enhanced its research and development strategies.
Moreover, the company has realized that metal printing will be the most important aspect for driving its growth in the industrial segment, and consequently, it had acquired Phenix Systems last year. 3D Systems unveiled the new ProX 300 Direct Metal printer, the first fully rebranded Phenix printer now included in the Direct Metals portfolio. This new production printer leverages Direct Metal Sintering (DMS) technology, which is capable of producing fully dense, chemically pure end used metal parts.
Moving onto the second reason, I don't believe that 3D Systems' acquisition strategy has done any harm. 3D Systems reported a 30% year-over-year organic jump in its revenue. Thus, I don't see why it is difficult to analyze the company's organic growth.
Furthermore, given that 3D Systems is estimated to triple its value in the next five years, I don't see why growing via M&A is a bad thing. Including 3D Systems' acquisitions, its revenue grew nearly 50% as compared to the corresponding quarter of the previous year. Also, focusing more on acquisition doesn't mean that the company is not spending on R&D. As I already said, 3D Systems has launched many new products this year and it has a perfect balance of M&A and R&D for driving growth. In fact, it had almost doubled its R&D spending in the last reported third quarter.
According to analysts, 3D Systems can grow its earnings at a CAGR of 23% over the next five years, and this is certainly an impressive growth rate.
3-D printing technology is still in an early stage of deployment, but the opportunities in this industry are massive. 3D Systems has been making the right moves to perform better than its peers. Therefore, I believe that thinking of 3D Systems as a short play isn't a good idea, especially considering the fact that it has been growing through both acquisitions and organic moves. Hence, even though the stock might appear overvalued, it isn't going down anytime soon as it is growing at a rapid pace.
Stocks Discussed: DDD,