3D Systems Is Still Great!

After two articles appeared at Seeking Alpha essentially questioning the veracity of 3D Systems (NYSE: DDD  ) accounting practices, the 3-D printing leader saw its stock take a bit of a drubbing.

With the overall market down almost 2% in the same time period, 3D Systems really hasn't taken as much of a beating as you'd think would be the case when it comes to accusing a company of fraud. Unfortunately, it seems a desire by short-sellers to push the stock lower coupled with a misunderstanding of basic accounting principles has led to a 10% decline in the stock.

3D Systems snapshot

Market Cap

$2.4 billion

Revenues (TTM)

$322 million

1-Year Stock Return

146.3%

Return on Investment

8.7%

Estimated 5-Year EPS Growth

19.6%

Dividend and Yield

N/A

Recent Price

$41.57

CAPS Rating

****

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; 3D Systems doesn't pay a dividend.

I'm not one of those who thinks that simply because a short-seller has a different motive than me that his analysis should be dismissed out of hand. It's often the short-seller who isn't blinded by allegiance to saying, "Buy! Buy! Buy!" who uncovers hidden gems of truth. But let's not also forget that sometimes there is motive behind him saying, "Sell! Sell! Sell!"

Math is hard
The biggest charge leveled against 3D Systems was that it was bogusly recording revenue as organic when in fact it was coming from acquisitions. Yet the printer maker fully disclosed the different growth rates it enjoyed in both areas in its SEC filings and accounted for the acquisitions made just as every other company that's made an acquisition does: you separate out the revenues until you lap them at the anniversary date of the purchase and then you fold them all into the total revenues. To suggest -- as one of the bears did -- that 3D Systems should continue segmenting acquisitions made long ago displays a knowledge gap in GAAP accounting.

Now I might take issue with a company that grows by acquisition, as oftentimes it's a strategy that works until it doesn't. Cisco Systems (NASDAQ: CSCO  ) was one that gobbled up everything in sight for a time and grew large beyond measure, until it fell hard.

Yet there are some companies that have made a science out of it. Nuance Communications (NASDAQ: NUAN  ) is one that had done quite well for itself for the most part, rolling up the voice recognition market under its umbrella, even if I do remain leery of the practice as it can lead to indigestion. But that's a whole different ball game than saying its accounting is fraudulent, which 3D Systems' is apparently not.

In the sight of greatness
As I pointed out a couple of weeks ago, the 3D Systems recorded sales surging 57% in the third quarter to $90.5 million and profits doubling. And as was mentioned then, organic growth -- the kind not made from acquisitions -- was up 26%! It also sold fistfuls of new 3-D printing units, showing this technology will be a transformational one for the industry.

While Stratasys (NASDAQ: SSYS  ) and Dassault Systemes  (NASDAQOTH: DASTY  ) are also players in the niche, it's my belief 3D will lead them because it's closest to breaking the $1,000 price point. I've highlighted before that that was the point at which Hewlett-Packard (NYSE: HPQ  ) saw ink jet printers create a groundswell of demand. So with 3D's new $1,300 Cube printer offering functionality coupled with its online technology that gets you printing right out of the box, it will soon pull away from the competition.

The long and short of it
As I said, I don't dismiss short-sellers out of hand. David Einhorn broke through the circled wagons of bullish opinion on Green Mountain Coffee Roasters (NASDAQ: GMCR  ) . Before him Jim Chanos was notably -- and correctly -- short Enron. Heck, even Citron Research helped bust the myth of Chinese reverse merger stocks by revealing their shady financials.

Yet you can't just take their position at face value, and looking at the bearish opinion on 3D Systems shows big problems with their short thesis, and perhaps underscores the reasons why bulls are bullish about the 3-D printing leader. There are risks since you don't know how well, really, consumers will take to 3-D printing, particularly in these economic times, but one risk certainly doesn't seem to be fraudulent accounting.

Profits in bas relief
Since I rated 3D Systems on Motley Fool CAPS at the start of the year, the stock has more than doubled, compared to a 4% gain in the S&P 500. Though its shares have pulled back 10%, it's still an expensive stock. While they trade for less than 11 times earnings estimates, its enterprise value goes for 46 times its free cash flow, so while we can thank the bears for giving us a better entry point on 3D Systems, I'm not certain they've given us a great one.

But tell me in the comments box below whether you think the 3-D printing specialist will soon make short work of the short-sellers.

A great opportunity for you
There's more to the 3-D printing story. With the U.S. relying on the rest of the world for such a large percentage of our goods, many investors are ready for the end of the "made in China" era. Well, it's arrived, and with the balance of manufacturing power shifting yet again, you can profit with the "3 Stocks to Own for the New Industrial Revolution." They're the biggest industry disrupters we've seen since the personal computer, and you can read more about them in our free analyst report. Click here to learn more.


Read/Post Comments (7) | 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 November 15, 2012, at 5:45 PM, thebigee wrote:

    "Unfortunately, it seems a desire by short-sellers to push the stock lower coupled with a misunderstanding of basic accounting principles has led to a 10% decline in the stock."

    I see, ... someone from the Motley Fool is using the word "unfortunately" about "short-sellers", when in fact, Motley Fool posts that they themselves have short positions in DDD.

    Pathetic.

  • Report this Comment On November 15, 2012, at 5:58 PM, thebigee wrote:

    DDD to hold web-conference to discuss recent articles, ... and I assume that includes articles of which the Motley Fool has allowed to be published through them, ... for which they also have short positions with DDD.

    "We are aware of certain recent articles and their materially inaccurate and misleading conclusions. We reaffirm the accuracy of our public filings and accounting methods in all respects, and are pursuing legal remedies to hold those responsible parties accountable for what appears to be malicious, irresponsible and self-serving articles. We look forward to discussing, fact-checking and clarifying these inaccuracies for the benefit of our shareholders, customers and partners, who we believe have been irrevocably harmed by these articles," said Abe Reichental, President and CEO of 3D Systems."

    Will the Motley Fool be one of the defendents as DDD is "pursuing legal remedies to hold those responsible parties accountable for what appears to be malicious, irresponsible and self-serving articles", ... since they allowed such an article from a "blogger" (yeah, right) to be posted under their Motley Fool umbrella name?!?

    And can the Motley Fool be trusted anymore. They once spoke of the "evils" of Wall Street, and giving the individual investor trustful information, unlike some of those from Wall Street, who simply tried to influence decisions to buy or sell, and then do exactly the opposite.

    Well, ... now it appears that the Motley Fool is cut from the same cloth, ... and is not that much different than the others.

  • Report this Comment On November 15, 2012, at 6:09 PM, Kipmie wrote:

    No. If there is a fault in the article, it is only that it did not call out the unscrupulous or erroneous short-sellers as a distinct group from the rest. It's unscrupulous to post fraudulent, rumor-mongering articles in the press, or even to chat it up negatively, simply because you are short and want the price to go down. It's unfortunate if someone misunderstands GAAP and posts a misleading article. These things may have happened here, and recently to EBIX as well, with much worse result there. But, holding a short position is nothing immoral or unfortunate, and it's often Foolish (the article notes the EV/FCF of 46 for DDD). Short-sellers are not an organized group that speaks with one voice.

    --jh--

    (long both DDD and EBIX)

  • Report this Comment On November 15, 2012, at 6:26 PM, Kipmie wrote:

    On your second posting, thebigee, could you point out which article you are referring to? The one above this comment section does not use the term "blogger", which you put in quotes, nor does it make any fraudulent or erroneous claims about DDD. The second posting seems rather speculative and inflammatory to me. The Fool includes a large number of investing teams, with different goals and outlooks. They often hold differing positions and give conflicting advice, because the strategies they are pursuing are different. Each service controls its own portfolio. Everybody knows this. One group can hold a short position and another can write an article critical of certain short-sellers, or even the taking of a short position. So, what's your point?

    And, I'll ask, what's your position in DDD?

    --jh--

  • Report this Comment On November 15, 2012, at 6:29 PM, pollution1 wrote:

    In the other Fool.com article from today as well they say this, 'Over the past decade, revenues for 3D Systems have remained effectively flat if you exclude acquisitions' is this true Rich Duprey?

    It seems you and Adam Levy have diferent statements/opinions.

  • Report this Comment On November 15, 2012, at 7:05 PM, TMFCop wrote:

    The great thing about the Motley Fool is the diversity of opinion it allows. Writers are able to take divergent viewpoints about a stock, even one that's recommended by a Fool service, and offer a negative opinion...so long as a cogent argument can be made. That goes for a long opinion as well.

    In the articles, and on the discussion boards, you'll find very little "yo momma" barbs or "this stocks going to the moon!" without offering some rationale behind the sentiment.

    There's no company line to toe, writers are able to freely express their investment opinion, both for and against a stock.

    Now I have problems with the revenue assumptions Gray Wolf and the other Seeking Alpha columnist relied upon to show stagnant revenue growth. As I mentioned above, you don't back out an acquisitions revenues after a year's time. No one does that.

    Moreover, revenue growth is often the very purpose an acquisition is made: you think it's going to contribute to the overall growth of the company. You sure don't buy for it to be a drag on operations.

    The two companies I mention in the article, Nuance and Cisco, both have made a ton of acquisitions over the years. Does anyone think they out to be breaking out the revenues of companies they acquired 10 years ago? Of course not!

    Now does it make it difficult to value them? Yes it does, and it's why I'm leery of companies that rely upon growth by acquisition strategies, but that doesn't mean what they're doing is fraudulent, and to suggest it is shows you are either ignorant of accounting principles or you have an agenda you're trying to further by relaying false information.

    I've never shorted a stock, but only because I think the market can remain irrational longer than I could remain solvent. Yet I have no problems with people shorting stocks. I thinks it's a very valid strategy to use, just not for me. So there's nothing unethical about be short shares; it's shorting shares and disseminating facts made up out of whole cloth in an effort to drive the stock down that would be unethical.

    I'm not saying that's what's happened here; perhaps it is just a lack of understanding about GAAP principles.

    So I hope that gives you a little better understanding. Thanks for reading.

    Rich

  • Report this Comment On November 17, 2012, at 12:57 PM, RockyTopBob wrote:

    thebigee wrote

    "I see, ... someone from the Motley Fool is using the word "unfortunately" about "short-sellers", when in fact, Motley Fool posts that they themselves have short positions in DDD."

    It's unfortunate that inexperienced investors don't know the difference between a direct short sale of stock vs. "short" options like covered call or puts. The positions listed in the TMF disclosure above are options which are "short" simply because they were sold options.

    Selling a put on a stock is often done because you believe in the value of the stock but want to collect an options premium while you will be happy to buy more stock at the strike price.

    As TMFCop wrote, TMF services could possibly recommend shorting a stock in one service while holding it long in another. The services are independent and allowed to follow various opinions of a company. That's what the word "Motley" refers to in The Motley Fool. Unlike services such as Seeking Alpha, TMF never posts unfounded opinions in order to influence or manipulate a stock price.

    Regards,

    Bob

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