3D Systems (DDD, Financial) continues to nosedive as the stock lost 25% of its market cap during the last month. Disappointing earnings results was the primary reason for the poor stock performance. Despite several positive developments including launching of a new printing platform, contract extension with Bayerische Motoren Werke (BMW:XTER) and positive sentiment from Piper Jaffray, 3D Systems is struggling to trend upwards.
The company missed both the top line and bottom line consensus guidance. EPS was in the red. Analysts were modeling for an EPS of 12 cents. Revenue performance was no different. The company missed revenue consensus by $10 million, translating into a 2.2% year-over-year decline. To make things worse, the management withdrew the full year guidance. The stock was down ~18% in afterhours trading. However, all is not bad for 3D Systems. Since earnings disappointment, there has been a couple of positive developments.
Recent positive developments
- New printing platform
3D Systems recently launched a new printing platform that allows customers to seamlessly switch from functional prototyping to low-volume production. The new printing platform targets the plastic low-volume production needs of key industries like automotive and healthcare along with addressing specific requirements for aerospace interior cabin parts. This bodes well for 3D Systems as automotive, dental and aerospace are among the industries with the highest potential for adopting 3D printing system to address the manufacturing needs.
“The motor vehicles sector and medical and dental sector are also strong. The motor vehicle industry continues to use additive manufacturing for product development, although production volumes have typically been too high to use the method for most final part applications”, notes Wohlers Associates in 2017 3D printing industry report.
- Contract extension with BMW
Another positive for 3D Systems was the extension of contract with BMW. The automobile giant will continue to use 3D Systems’ on-demand manufacturing service for designing and manufacturing functional prototypes. Note that BMW is using the manufacturing service, not buying the printing equipment from 3D Systems. Manufacturing services is believed to be a high margin business compared to selling printers outright.
- Positive analyst sentiment
Some of the analysts including Piper Jaffray met the recent developments with optimism. Troy Jensen, a Jaffray’s analyst, is convinced that new products will help 3D Systems erase some market share losses next year. He further argues that the stock is quite beaten up resulting in an opportunity to buy low. However, the analyst expects headwinds to clear up in next three to four months.
Why there’s no positive reaction?
Specifically, launch of new platform and extension of contract might not be incremental to the business performance of the company. First, the new printing platform is targeting the need of plastic prototyping; growth lies in metal printing. A 2017 survey by Wohlers indicates that nearly half of the additive manufacturing service provides are using systems that produce metal parts. Moreover, availability of new platform doesn’t mean that it will translate into increased market share. This might be among the reasons why investors are not thrilled about the news.
Regarding the extension of contract with BMW, it’s not new business. Although this indicates BMW’s confidence in 3D Systems, the extension doesn’t bring incremental revenue to the table.
Generally, the problem may lie in the increasing competition in the industry along with diminishing technological advantage. Several key patents of 3D Systems expired during the last couple of years, and the stock is under performing since then. 3D Systems R&D expense was down 7% during the third quarter on year-over-year basis, indicating a commoditizing trend in the industry. Hewlett-Packard’s (HPQ, Financial) entrance in metal printing is doing no good to 3D printing industry leaders like Stratasys(SSYS, Financial) and 3D Systems.
Piper Jaffray is right to say that the stock is quite beaten down. The price-to-sales for DDD is lowest among the peer group. See the chart below:
But, valuation alone shouldn’t be used a decision point for investment in 3D Systems. Unless there’s a prohibitive technological advantage, emerging players will continue to eat into market share along with driving the margins down. 3D Systems’ gross margin went down from 48.5% during the first nine-months of 2016 to 46.7% in the same period during 2017. The point is that valuation isn’t the only metric to gauge the investment prospects of 3D Systems.
The industry has promise
However, disappointing performance of 3D Systems shouldn’t be construed as bad for the overall 3D printing industry. The industry is set to witness double digit growth. Wohlers Associates, the go-to firm for additive manufacturing research, are predicting a 32% CAGR in the industry during 2017-2020.
The market conforms to this thesis. 3D Systems is down 40% during the past year while The 3D Printing ETF (PRINT) is up 19.3% during the same period. This is understandable as industry is growing, attracting more 3D printing players. There are low barriers to entry because of expiration of 3D printing patents. While industry growth is good news for emerging players, it’s quite the opposite for leading players. Leading players are at risk of losing their market share to relatively new players, thanks to expiry of patents that’s commoditizing the 3D printing arena.
Final thoughts
Investing in the 3D Printing ETF is a better way to get 3D printing exposure. Even if 3D Systems trends upwards due to cheap valuation, it’s still a part of the 3D Printing ETF. Investors will benefit from the uptick. On the flip side, if 3D Systems turns for worse, other constituents of the ETF will offset the loss from 3D Systems.
Earnings were disappointing and investors, rightfully, withdrew their investments. New positive developments failed to have a material impact on the stock price as the benefit for 3D Systems is marginal at best. Due to changing industry dynamics, it’s better to stick to an ETF rather than investing in individual additive manufacturing companies.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
