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Here’s the Other Side of 3D Systems’ Stock Decline

April 30, 2014 | About:
ICRAOnline

ICRAOnline

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Shares of 3D Systems (DDD), a leader in the three-dimensional (3D) printing market, plummeted 9.1% after it reported a mixed first quarter results and provided a softer-than-expected fiscal outlook. Year to date, the company’s stock dropped more than 50%. What is the reason for the stock price fall? Let’s zero in, but before that a quick quarter review would be essential.

Quarter Snapshot

Maintaining the trend of double-digit revenue growth for the past consecutive 17 quarters, 3D Systems’ revenue jumped 45% year over year to $147.8 million during the quarter. A broad-based growth across its product and service segments led the revenue to beat the Street’s expectation.

But the revenue growth was not reflected in the profitability. Adjusted earnings of $0.15 per share dropped 28.6% year over year, although it was in line with the Street’s expectations. The primary reason behind the drop was significant cost rise. Let’s find out what led to the cost hike.

Surging Cost

Dealing in 3D printing has been a costly affair, not only for the end-users, but for manufacturers as well. 3D Systems, which has experience of 25 years in this field, is also fighting to keep costs under control.

As seen in the chart below, research and development (R&D) expense has far outpaced the revenue growth and other expenses.


Source: 10K (2013 & 2012), Chart made by the author.

The 3D printing industry and rapid technological change go hand in hand. No wonder companies have to be on their toes to develop new and enhanced products to meet growing demand from various industrial segments. This requires huge investment in R&D programs, without which launching new products suiting the industrial sector and latest trend will get difficult.

In the past quarter 3D Systems invested heavily in R&D, which grew roughly 165% year over year, and launched nine new products. As a result, revenue from new product during the quarter surged 71% year over year.

Huge R&D and investment expenditure have put some pressure on the profitability margins that has drawn investor concern. But they need not worry as such spending is opening up avenues for further revenue growth.

But growing operating expenses is not the only concern....

Growing Number of Acquisitions

3D Systems has supplemented its growth with more than 50 acquisitions over the past three years. Last year, it completed 11 acquisitions and has already taken over two more companies to date.

Last month, 3D Systems bought Medical Modeling, a pioneer in developing personalized surgical treatment and medical devices. It is expected that the acquisition will help it expand its presence in the extremely potential healthcare vertical.

There’s no doubt that the addition of the companies has helped 3D Systems to add new product lines, increase geographical reach, and expand exposure into many industrial sectors. But contribution from the inorganic segment (acquired units) needs to grow significantly. Only then, proper synergies from the acquisitions can be achieved and will be accretive to the company’s profitability. Last quarter, the company reported organic growth of 28%, while inorganic growth was only 17%.

But as the scope in the 3D printing arena is growing, it is expected that the company will get enough opportunity to grow its inorganic revenue.

3D Printing Outlook

Market experts opine that spending in the extremely potential 3D printing market would amplify in the coming years. According to Researchandmarket.com, global 3D printing materials market could grow at a compounded annual growth rate of ~20% between 2013 and2018.

In order to capitalize on the opportunity, Stratasys (SSYS), the second biggest player in the industry, acquired three companies last month. On the other hand, computing giant Hewlett-Packard (HPQ) is also attempting to pounce in the market with its years of rich experience in the 2D printing market. This suggests that 3D Systems is not the only one looking for meaningful acquisitions; other players are also preparing their arms to make the most of the 3D printing market.

Parting Thoughts

Indications are clear that competition is going to intensify in the 3D printing space in the coming years. However, 3D Systems seems to be on the right track with its massive R&D investments. But it may have to be selective with its acquisition strategies to monetize them quickly. Once its investments start paying off and synergies from the acquired units are achieved, 3D Systems can grow its market share as well as secure profitability.


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