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3D Systems - Don't Be Fooled by the 'Cheap' Valuations

April 29, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

3D Systems released its quarterly report today, and the company missed the analysts' estimate on earnings, yet again. The company's revenue was in line with the estimates; however, it is not a big achievement as 3D Systems acquired around five companies in the last few months. The company has plummeted over 60% in the last few months, but it is still not a good buy.

Why 3D Systems Is a Sell

While the likes of Stratasys (SSYS) have been growing earnings, 3D Systems has been punished by the market because of the company's failure, and there are many reasons to believe this trend will not end any time soon.

3D Systems has acquired more than 40 companies in the past three years, but now its earnings are expected to take a hit as it invests in research, manufacturing and marketing. Thus, essentially, 3D Systems' acquisitions haven't proven accretive to earnings, and since earnings are expected to decline on a year-over-year basis in 2014, it doesn't look like an enticing investment.

If you compared it to a peer such as Stratasys, 3D Systems looks like a weak investment. Stratasys' earnings are expected to increase to $2.24 per share this fiscal year from $1.83 a share in 2013. Hence, Stratasys is following the right path to growth while 3D Systems seems to have shot itself in the foot by acquiring a horde of companies and now spending on research and development.

Moreover, 3D Systems is highly overvalued, especially considering the industry's prospects. The stock trades at a trailing P/E of nearly 90, and even on a forward P/E basis, it is expensive. Comparatively, Stratasys is cheaper at 57 times forward earnings, and its PEG ratio of 3.23 is lower than 3D Systems' 4.61.

These valuation levels of 3D Systems are very, very high since the industry itself is expected to grow to $6 billion by 2017, and $10.8 billion by 2021, according to Terry Wohlers, president of Wohlers Associates. According to Forbes, Wohlers Associates is a research firm that exclusively focuses on 3D printing, so the report can be counted upon for its data.

Great, but Highly-Optimistic Expectations

What's most fascinating is the fact that 3D Systems is bigger than the industry itself. The company's market capitalization of almost $8 billion eclipses the expected size of the market going forward. This seems absurd as 3D Systems is not a monopoly player in the 3-D printing industry. The company has a number of rivals popping up, with the likes of Stratasys, Voxeljet (VJET), ExOne (XONE), and other prospective players such as Hewlett-Packard (HPQ) entering the market.

The 3-D printing market is not a winner-take-all industry and it's safe to assume that each 3-D printing company will command at least some portion of the market. Thus, assuming that 3D Systems commands a market share of 25% (which is very optimistic given the amount of competition) by 2021, it will still have a P/S ratio of over 2 in 2021. Therefore, it's evident that 3D Systems is absurdly overvalued.

The earnings report should not bring in any new surprises as the company had recently updated its forecast. 3D Systems' earnings and revenue should fall in the company's guidance range, but that doesn't mean it is a good investment.

Spending lavishly on M&A instead of R&D might backfire. Most researches show that M&A have a success rate of about 50%. Statistically, this means that half of 3D Systems' acquisitions have a chance of failing, which obviously will have a severe negative impact of 3D Systems' earnings going forward.

Bottom Line

Currently, 3D Systems investors are hammering 3D Systems. In addition, 11 main industry patents are set to expire in 2014. This will not only open the gates for entry of new rivals, but will also pave the way for a price war. So, investors should stay away from 3D Systems, till it is trading above $30.


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