3 Reasons to Sell 3D Systems

Some companies are older than they look. Would you believe that 3-D printing mainstay 3D Systems (NYSE: DDD  ) is as old as Windows? The innovative company was founded in 1986, a few short months after the first (and largely forgettable) version of Windows was released. Today, both are known worldwide, though each for quite different reasons.

I've been bullish on 3D Systems for some time, but that doesn't mean I can't recognize the risks it faces. Yesterday, I offered you three reasons to buy the company's high-flying stock. Today, I'll take the contrarian view, offering you three reasons 3D Systems might be too dangerous for your portfolio. The final decision, as always, will be up to you.

1. Declining profit margins
Some companies sacrifice short-term profits for long-term market share. Amazon.com (Nasdaq: AMZN  ) is notable for this strategy, as its low single-digit net margin over the last decade attests. Founder Jeff Bezos has shown an extreme willingness to forgo juicing profits in the present in order to spend to invest in projects that should keep Amazon at the forefront of Web technology and retail for years to come. But there are occasions when this can be a dangerous strategy, such as when a company has been on a major acquisition binge despite holding less than $100 million in the bank.

The company's trailing-12-month free cash flow stands at $40 million, but it just completed a $137 million buyout of two complementary companies at the start of the year. Rival Stratasys (Nasdaq: SSYS  ) is no better, with just $24 million cash on hand, but Stratasys hasn't made any recent plans to offer $100 million worth of new shares, either. Net margins have been on a roller coaster for 3D Systems over the past 10 quarters, while Stratasys has been much steadier:

Quarter

3D Systems Net Margin

Stratasys Net Margin

Q4 2009 9.8% 19.4%
Q1 2010 6.4% (1.9%)
Q2 2010 7.8% 7.8%
Q3 2010 12.9% 10.5%
Q4 2010 18.3% 12.6%
Q1 2011 14.2% 14.5%
Q2 2011 24.3% 10.6%
Q3 2011 12.6% 14.8%
Q4 2011 11.5% 13.1%
Q1 2012 8.0% 10.1%

Source: Morningstar.

This alone isn't enough to cause worry, but the second reason could be the straw that broke the 3D printed camel's back.

2. Serious global economic headwinds
As much as 3D Systems might like to be a consumer-focused company, 3-D printing is still largely the realm of the corporation. The company has a large list of corporate clients, including Ford and many other carmakers, Boeing, Airbus, Northrop Grumman, and both major U.S. government aerospace branches, and a number of other consumer-focused multinationals.

This seemingly diverse mix of clients share one common denominator: all are at risk of substantial losses in the months to come. From Europe to China, many countries are seeing weak growth grind to a halt, and the U.S. government, particularly the military, has major budget cuts to contend with in 2013. This is hardly a problem unique to 3D Systems. However, when you consider that the company only became (barely) profitable at the end of the last recession, and has put major resources into pursuing a consumer strategy when consumers around the world may be tightening their belts with renewed vigor, it appears that now may not be the best time to jump aboard the 3D Systems train.

3. Consumer commoditization
My colleague Anders Bylund mentioned open source as a driver of future innovation last week, singling out 3D Systems and Stratasys for their ability to create products you might otherwise buy in stores. But 3-D printing has its own open-source movement that could seriously undermine 3D Systems' effort to expand into new markets.

MakerBot was selling inexpensive consumer 3-D printers when the Cube was just a gleam in 3D Systems' eye, and the start-up is committed to the open-source model. Thousands of MakerBots have been bought since 2009, and the company's Thingiverse already is what 3D Systems hopes its Cubify community will become -- a repository of designs made by loyal users. Shapeways is another 3-D printing design community with quite the selection of designs. One open-source 3-D printing concept, the RepRap, is a self-replicating printer that can effectively print new versions of itself, or at least most of itself. If that's not a threat to the big players, I'm not sure what is.

None of these options has the same breadth of functionality as 3D Systems' high-end machines, but they all pose real threats to the company's consumer efforts. If 3-D printing communities band together to design high-end printers as well, that might be 3D Systems' (and Stratasys') death knell.

Do these three reasons sway you from your appreciation of this company, or are they overblown concerns? I continue to believe that 3-D printing will be a major driver of future innovation, but that doesn't mean 3D Systems will be the company behind it. Let me know if I'm right or wrong with a comment, and maybe we can open-source our final decision.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Ford Motor, Amazon.com, and Northrop Grumman. The Fool owns shares of and has written calls on 3D Systems. Motley Fool newsletter services have recommended buying shares of Amazon.com, 3D Systems, Ford Motor, and Stratasys. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy.

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Read/Post Comments (12) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2012, at 1:59 PM, DrKickass wrote:

    I don't think open source is a big threat to 3D Systems. How many people do you know who are running Linux on their desktop vs. Windows? How many people are running OpenOffice vs. Microsoft Office? The biggest problem with open source is that there is no official support offered, so therefore it is often a non-starter in a corporate environment. I suppose sometimes a business will be created to offer "official" support for open source projects (e.g. Red Hat Enterprise Linux) but that still never seems to make a huge dent. Corporations want the security and support of a brand name, rather than some open source project hacked together by a bunch of geeks in their basements, who might decide to give up on the whole thing as soon as they get a paying job.

  • Report this Comment On June 27, 2012, at 2:17 PM, essejsemaj wrote:

    By, "...a bunch of geeks in their basements, who might decide to give up on the whole thing as soon as they get a paying job." I assume you mean, "IBM, Intel, Google, Canonical, Red Hat, and Microsoft who are paid while working at their real jobs".

  • Report this Comment On June 27, 2012, at 2:25 PM, HvyOnEzFool wrote:

    While I tend to agrees with DrKickass, open-source is growing within the government sector but I’m not sure how it undermines an emerging technology.

    My personal feeling has been that open-source attacks the “established status quo” by providing an alternative???

    On the flipside of your topic, how about playing the “Angels Advocate” and giving 3 reasons to keep 3D systems.

  • Report this Comment On June 27, 2012, at 3:30 PM, TMFBiggles wrote:

    @ HvyOnEzFool -

    I did yesterday. It's linked in the second paragraph.

    - Alex

  • Report this Comment On June 27, 2012, at 10:02 PM, Marmadukemark wrote:

    The Fools definitely have an advanced CYA program. First, you recommend DDD strongly as a buy; now, you give some (pretty good) reasons to sell. I've paid real money for your advice - make up your mind! BTW, where does the Fool rank Dassault Systemes?

  • Report this Comment On June 28, 2012, at 12:12 AM, TMFBiggles wrote:

    @ Marmadukemark -

    My personal preference leans towards "buy," as do the preferences of many other Fools.

    I wouldn't call it a CYA program to look at the flip side, though -- it's just better if you know all the angles of your favorite stocks than to just zero in on the positives.

    RE: Dassault, it's not in my circle of competence, so I couldn't tell you one way or the other. Sorry!

    - Alex

  • Report this Comment On June 28, 2012, at 9:38 AM, troym72 wrote:

    While global economic slowdown can be a risk factor, I think we could also look at the situation in 3D System's favor. If your company is facing financial struggles, it would still be good to reduce the cost or producing prototypes, etc. So, a company facing slowing sales, might choose to make a capital purchase (3D printing system) that would reduce their expenses. After all, Capital expendatures do not hurt the balance sheet, only net income. A company might sacrafice a quarter in order to make sure that future quarters were more profitable. Maybe I'm over-thinking this strategy. I'm not a corporate CEO, so I don't know how I would react facing the same economic slowdown. Would I tighten the purse strings on everything, or would I be willing to spend some money that would save me money in the long run? I don't know. :-)

  • Report this Comment On June 29, 2012, at 9:23 AM, vtsplash wrote:

    You guys are a real piece of work who has figured out the stock price will reflect your comments on it. So you issue comments that fit to your investment scheme without any conscience of what it does to other people investment balance. Where I use to have some respect for your opinions I have none now and think you are low life.

  • Report this Comment On June 29, 2012, at 9:34 AM, gosgos88 wrote:

    What a crock. So you don't have a real opinion or idea what to recommend one way or the other. You just want to write two articles on two different days and see how how many idiots will react just to your word. Well obviously it worked-----what arrogance.

    Report this Comment

  • Report this Comment On June 29, 2012, at 9:35 AM, gosgos88 wrote:

    How much money did you and your friends make with this manipulation

  • Report this Comment On June 29, 2012, at 5:14 PM, jumpunjim wrote:

    Wow. Some pretty harsh comments at the end there. I don't normally look at all of these posts but today, since the market went up rather dramatically and I have nothing to do at work.... I decided to see which stock I have (all of which have been based on the advice from you Motley Fool dudes) that is doing the best since I started this little journey. It just so happens to be 3D. My first thought was, "Since this stock has done so well since I bought it, why don't I just sell it and realize the profit?" When I first signed on I told myself that I was going to do what you guys recommend no matter what because I really have not done too well myself AND I'm paying you for your expertise. Anyway, my overall portfolio is only up about 1.3% so my question is this: Why DON'T I just sell it and realize the profit? I mean, sure I could hang on to it and ride it out but is it really going to go up so much more over the next 5 to 10 years that I will wish I had held onto it? You probably can't answer that but give it a shot! :) Thanks, Jim.

  • Report this Comment On June 30, 2012, at 10:15 AM, ThePalmettoFool wrote:

    Alex,

    You need to complete the trilogy with "3 Things Why You should Avoid 3D Systems".

    The secret is the balance sheet and statement of cash flows. The stock price is $34.14/share and their book value is $1.31/share. Along with negative cash flow to due excessive aquisitions, I smell another Enron here. One of the reasons the share price is hyper inflated is that the employees 401(k) is imbedded into a mutual fund that buys their stock. Only the C level boys there think this is a good ride. You may want to rethink about this one.

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