Analysts Debate: Is 3D Systems Still a Top Stock?

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing 3D Systems (NYSE: DDD  ) , the hottest company in one of the market's hottest niches: 3-D printing.

3D Systems by the numbers
Here's a quick snapshot of the company's most important numbers:

Statistic

Result (TTM or Most Recent Available)

Market Cap 

$2.6 billion

P/E and Forward P/E

60.6 / 31.6

Revenue

$322 million

Net Income

$36 million

Free Cash Flow

$50 million

Cash and Investments

$184 million

Printer Sales (and Y-o-Y Growth)* 

$34.1 million (130% growth)

Materials Sales (and Y-o-Y Growth)*

$25.5 million (38% growth)

Services Sales (and Y-o-Y Growth)*

$31.0 million (28% growth)

Healthcare Sales (and Y-o-Y Growth)*

$12.1 million (67% growth)

Revenue from New Products

$89.0 million in first nine months of 2012 (76% growth)

Printer Sales Growth

123% for Q3, 128% for first nine months of 2012

Key Competitors

  • Stratasys (Nasdaq: SSYS  )
  • Proto Labs (NYSE: PRLB  )
  • MakerBot

Sources: Morningstar and corporate reports.* Y-o-Y = year over year, Q3 2011 to Q3 2012.

Alex's take
I think 3-D printing has tremendous potential. I've probably written more about this technology over the past year than any other Fool, and in many of those articles I've been strongly bullish on 3D Systems. But three things are keeping me from recommending 3D Systems today.

First is growth by acquisitions. This was recently the subject of a bear raid that displayed a rather egregious lack of understanding of GAAP accounting principles. The issue caused some whipsawing in the stock this month, and even drew 3D Systems' CEO Abe Reichental into the fray, as he felt it necessary to hold a special conference call just to rebut two articles on Seeking Alpha. Don't worry, Abe, I'm not going to get creative with your books on this one. You can still hold a press conference about me if you want, though. I could use the publicity!

Over the last three years, 3D Systems has bought 31 companies. The decade before 3D Systems' buyout binge looks like this:

DDD Revenue TTM Chart

DDD Revenue TTM data by YCharts

Got that? Over a decade, 3D Systems' net income and free cash flow didn't budge, except maybe to move lower. Its revenue rose 42%. Then, starting toward the end of 2009, 3D Systems started buying up as many companies as it could. Profit and free cash flow jumped, and revenue rose 145%. This performance is indisputably better than that of rival Stratasys, which has only completed one notable acquisition in the same time period, of specialty 3-D printer manufacturer Solidscape in mid-2011. Its merger with Objet, which should reestablish Stratasys as the market leader over 3D Systems, has not yet been finalized. However, despite completing a single acquisition to 3D Systems' 31, Stratasys improved its revenue since 2009 by 60%. Its free cash flow -- which was already positive at the start of that year -- has doubled.

How many more meaningful acquisitions can 3D Systems make before it effectively consolidates all of the viable smaller 3-D printing companies under its roof? Will it simply continue to acquire every start-up with a decent idea? I just have a difficult time seeing this three-year burst of acquisitions as something that can be maintained for much longer.

3D Systems' valuation is also a concern. Its stock has been pumped to the moon in 2012, rising from a P/E that was under 20 a year ago to one that's over 60 today. The company's price to free cash flow ratio is also near all-time highs at 52, more than double the P/FCF level it dropped to a year ago. When a stock's P/E rises as quickly as its price for an extended period, then you're either in for some margin compression or you probably own Amazon.com (Nasdaq: AMZN  ) .

It doesn't take a whole lot to undermine a momentum stock. Just ask Green Mountain Coffee Roasters (Nasdaq: GMCR  ) shareholders how they feel about David Einhorn. Or ask Netflix (Nasdaq: NFLX  ) shareholders how they feel about Qwikster. The market is littered with stocks that used to have P/Es as high as 3D Systems' before a single piece of bad news started a long slide.

Finally, the technological aspect of 3-D printing isn't really as well-understood by many investors as it should be. Reading a lot of hype around 3-D printers almost reminds me of the scene in Star Trek IV when Scotty uses a Macintosh -- this was in 1986, mind you -- to create a metal from the future in less than 10 seconds. A lot of movies from the 80's had a similarly fawning blind spot when it comes to computers. Scriptwriters used "computer" as shorthand for "magic deus ex machina box," creating scenes that showed no understanding of how the devices worked just to wrap up a major plot point.

I'm occasionally guilty of excessive technological optimism as well, but I try to temper my expectations by offering examples of real-world capabilities. This is often absent in articles about 3-D printing. It's fascinating technology, but it's not going to work miracles. When investors turn technology into magic, it leads to bubbles, and bubbles always pop. Always.

3D Systems might be one of the two most important 3-D printing companies on the market today, but that doesn't mean it's a great buy right now. Remember the old greedy-fearful adage. All I see are investors with dollar signs in their eyes, thinking about replicators. This may be the technology of the future, but investing is about making the best use of your money in the present, and I have to say that I do not think 3D Systems can sustain its current price.

Sean's take
I'm not sure how many times I have to say it before it finally sinks in, but we as investors are horrible predictors of when a technology will take off. Everyone expected Amazon's marketplace business and cloud business would be instant hits. They did become successful platforms eventually, but nowhere near as quickly as everyone expected. The same can be said of genome sequencing, where sequencing price points have finally dipped enough that it's conducive for researchers to use their technology.

As cool as 3-D printing is, and as low as its prices have moved, it's just not yet a commercially feasible or fully understood technology, and it's going to take some time before it is. Do I think the technology has merit, as many of my Foolish colleagues have described? Absolutely. But I doubt we're ready for the technology to take off just yet.

One concern I have is 3D Systems' reliance on acquisitions to drive growth. As Alex notes above, in the past three years 3D Systems has purchased 31 companies, which has been the primary driver of its growth. Can 3D Systems grow organically? I'd say yes, but we're probably looking at nothing more than high-single-digit organic growth, as compared to the robust double-digit growth most pundits are forecasting. This also relates to the fact that half of 3D Systems' revenue stream comes from outside the U.S. With both Asia and Europe experiencing slower growth, 3D Systems' prospects may prove too bullish. 

3D Systems' valuation is also a major concern. In terms of book and sales valuation, 3D Systems is priced higher than at any time over the past decade, despite being profitable in only five of the past 10 years. This is important, as I see its technology being extremely susceptible to economic downturns. Simply put, at even 27 times forward earnings, I don't see this stock being able to hold its current valuation if GDP growth slows further.

In total, I'd lean toward being a modest long-term optimist on 3D Systems. However, at its current valuation, and with economic growth looking tepid at best, I'd actually advocate a short-term bet against 3D Systems here.

Travis' take
I'll approach this with the viewpoint of someone who has actually designed hundreds, if not thousands of parts that were rapid prototyped with a 3-D printer of some sort. Many observers may be surprised to find out that this is not new technology at all; it's just more accessible for the average designer or consumer than it was when I began making parts over a decade ago. At least some of this new-found attention is a little naïve about the novelty of 3-D printing.

One of the products that has brought a lot of attention to 3-D printing is 3D Systems' Cube printer and its Cubify marketplace. It has allowed a whole new demographic of people to see and build 3-D models, and its attractive price point makes it feasible for a whole new set of customers. But the general technology isn't new at all. I remember watching larger machines do similar work with more precision at least five years ago.

I don't say this to tamp down everyone's excitement over 3D Systems' products, but to highlight the fact that some industries have been using this technology for a long time. Yes, the materials are better, the interface has improved, and costs have come down, but it isn't new!

Is 3D Systems worth buying with this in mind? I'm skeptical of the company's valuation, as my comrades above have pointed out, and I think competition is a huge challenge. I also don't see how the market can expand quickly enough to keep organic growth high for years to come. Like I said, the main target market has been using this technology for years, and it's still too expensive to be a cool toy for consumers.

Some people also think that 3-D printing will somehow be able to replace injection-molded manufactured parts in a big way. We hear stories of 3-D printing used on movie sets or in Jay Leno's garage and the mind wanders to a world of possibility. 3-D manufacturing may eventually happen, but betting on the mass adoption of relatively slow and relatively high cost 3-D printing is risky at best. It serves an incredibly useful purpose if you're designing parts that will eventually be molded or want a one-off run of something, but there are more effective ways to manufacture small batches of parts. Proto Labs can make an actual molded part, with higher quality materials than are used in 3-D printing, and have it to you the next day.

You may have also heard about mini-manufacturing facilities that have popped up using 3-D printing to turn around parts quickly for anyone who wants them. "But Travis, when these businesses expand around the world, the 3-D revolution will take hold!" I have news for you. The custom mini-manufacturer isn't a new business model either. If you live in an urban area I bet you can find one a short drive away and get a 3-D modeled part made by morning. 3-D printing is new to many but it's a pretty well-established industry, with well-known advantages and plenty of flaws.

When weighing the risk and reward for 3-D Systems, I just can't get behind an outperform call at the current price. Maybe we'll miss out on a huge winner if adoption rates pick up and speed and materials improve, but I'd rather do that than buy a company that's priced for growth and doesn't grow. We know that's a recipe for disaster in investing.

The final call
With two calls for an underperform and Travis choosing to avoid the stock entirely, it looks like we three Fools will go on the record placing a short-term underperform call on this stock, which we will probably reevaluate at the end of the year. You can find a history of our calls on our TMFYoungGuns CAPS page, where we're currently beating index by almost 100 points.

While we can't support 3D Systems today, we'd like to offer you three alternatives for your growth portfolios. Each stock has firm footing in a lucrative niche market, but none have (yet) grown to 3D Systems' outlandish valuation. The inside scoop on these three "Middle Class Millionaire-Makers" is available in our exclusive -- and completely free -- report. All you need to do to is click here to learn more now.


Read/Post Comments (19) | Recommend This Article (13)

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 21, 2012, at 12:12 PM, ScottCherf wrote:

    Question for Travis:

    Travis, as I understand 3D is the only company on the US market offering machines that produce fully dense metal parts. Do you think this differentiates them in any significant way?

  • Report this Comment On November 21, 2012, at 12:48 PM, dion2727 wrote:

    The three of you are perfect FOOLS.You cannot see the fruit from the trees.The fruit are areas such as man's curiosity and man's health reference cubify and the significant entry into the health industry via their radiolgy arena.3D could never have gotten this far without ahuge investment in RandD.They bought this in an amazingly rapid fashion and thrust themselves into a preeminent worldwide position in the 3D world.I've owned this company since the issue of the IPO.You have no idea how many well-intentioned analysts,brokers,and so called analysts have poohpooed my investment.You too have a view that is based only on your narrow mathamatical skills and lack of dreams.You all look at this field in steady state or linear construct.I dream of people on huge scale will find 3D as a means to escape from government,corporate,and union domination of their personal lives and an oppotunity to fulfill their dreams and the cottage industrial world will be refashioned.Dream a lot as I do as a retired Electronics Engineer 85 yrs. young who has been at the pinprick of technology.3d keep dreaming young people need to be unchained.

  • Report this Comment On November 21, 2012, at 12:50 PM, lynmar79 wrote:

    This is for anyone from Motley Fools...I just received my December issue of the Motley Fool Stock Advisor newsletter. On the back page disclosing MF's holdings as of 11/13/12 it states..."and is short 3D Systems and has short Jan. 2013 $47 puts on SBUX"...Is this also a mistake? I'm starting to really wonder what's going on behind the curtain. Then today MF's releases a bearish article on 3D Systems. What are you guys up to?

  • Report this Comment On November 21, 2012, at 12:59 PM, jyothishn wrote:

    @lynmar79

    "short Jan. 2013 $47 puts on SBUX" - means they are willing to go long at 47, right?

    Am I reading that right?

  • Report this Comment On November 21, 2012, at 1:26 PM, lynmar79 wrote:

    The put buyer is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer (seller) of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put.

  • Report this Comment On November 21, 2012, at 1:48 PM, TMFBiggles wrote:

    @ dion2727 -

    "When investors turn technology into magic, it leads to bubbles, and bubbles always pop. Always."

    @ lynmar79 -

    There are various Motley Fool investment services, as well as a number of Motley Fool writers who contribute articles for the free-content side of the site, and who (in most cases) have no influence over the selection methodology of the investment services. You can count the three of us as part of the latter group. If any of us participated in the investment service stock selection, we would disclose that relationship.

    I was unaware of any short position the Fool might have had until it was brought up during last week's bear raid, and it has no influence over my decision here.

    - Alex

  • Report this Comment On November 21, 2012, at 1:52 PM, ScottCherf wrote:

    @lynmar

    It sounds as if they're just practicing what they preach since the article is clearly short DDD. Since they hold the opinion the stock is overvalued we can assume they're shorting it. I know one of the two articles published by Seeking Alpha (the Gray Wolf article) was written by a short, I can only guess the other one was too.

    I agree the "growth by acquisition" model is a dangerous one, consider cisco Systems in 1999. Eventually growth will slow. Has the 3D print industry reached that point? I don't think so, I personally feel there are many miles to travel before that story gets put to bed.

    I appreciate Travis' input most of the three given his experience with rapid prototyping, but I also sense it's been focused on the production of plastic models. The real future of 3D will become apparent with the broad application of direct metal laser sintering, most especially when that technology is developed to produce components using multiple materials (for example aluminum and copper, steel and aluminum, etc). In other words, he ability to print an automobile transmission. It's not science fiction anymore.

    I firmly believe 3D printing is a disruptive technology on a par with the internet. Expect very high multiples. Expect very high profits. But watch out, because when the music stops there *will* be a hard fall for anyone without a chair. I don't think we've reached the vertical asymptote yet, and the stock price/revenue growth charts bear witness to that.

  • Report this Comment On November 21, 2012, at 2:20 PM, lynmar79 wrote:

    @scottCherf

    Great response and I totally agree with your points. As far as Alex's article is concerned...no biggee. LOL

    On a side note, If MF's did have a short position prior/during the Adam Levy article, I would think 3D Systems could take legal action against both MF's, and Adam Levy. I'm sure you're aware that 3D Systems stated they would take legal action against the authors of these articles. This could get very interesting.

  • Report this Comment On November 21, 2012, at 3:01 PM, ScottCherf wrote:

    @lynmar79

    I just don't follow legal actions because in the end I find they make no sense. The law as practiced in the US isn't rational :)

  • Report this Comment On November 21, 2012, at 3:41 PM, suavan1 wrote:

    Ah......you do realize that you tore a new one into Doug House a week ago from seeking alpha right??? Wow this is really not a good look for you! It's making you look like a flip flopper.

  • Report this Comment On November 21, 2012, at 4:35 PM, lynmar79 wrote:

    suavan1, are you addressing me? If you are, I'm consistent in that I believe 3D Systems has every right to pursue the authors of the articles questioning the accounting practices of the company....Douglas House, Gray Wolf and Adam Levy. IMO, they harmed the company and their shareholders. I don't understand your flip flopper comment.

  • Report this Comment On November 21, 2012, at 5:02 PM, TMFBiggles wrote:

    @ suavan1 -

    As shocking as this may seem, there is more than one person who writes for The Motley Fool, and we don't always agree on everything. Jim Mueller is the analyst who rebutted the Seeking Alpha short-sellers last week.

    - Alex

  • Report this Comment On November 21, 2012, at 5:54 PM, lynmar79 wrote:

    suavan1, I now see you were addressing TMFbiggles....sorry.

    TMFBiggles, are you and Adam compensated by the MF's for your articles? I've asked this question multiple times and have not received an answer....Thanks

  • Report this Comment On November 21, 2012, at 5:57 PM, dion2727 wrote:

    .As one at 85 I celebrate those who do create new and imaginative products {i.e.Jobs,Bezos, and many many more from the first inventor] and I also understand the analytical processes you present.but some of the vitriol is unnecessary.If you disagree and if you represent short positions state them up front without disguising them so that we understand where you are coming from.Then we may be able to respect your commentaries.

  • Report this Comment On November 21, 2012, at 6:58 PM, TMFBiggles wrote:

    @ lynmar79 -

    I can't speak for Adam. His opinion and compensation, whatever it may be, had no bearing on the content of this article. Fool contributors are compensated. I'm not sure what bearing that has on this article, either.

    @ dion2727 and ScottCherf -

    Our financial holdings are all disclosed. None of us hold any short positions or are seeking to further any short positions held in the Motley Fool corporate structure. Disclosures appear in every single article to inform readers of any financial stake that everyone involved holds at the time of the writing.

    Placing an underperform call in CAPS does not equate to a financial commitment. It's just a way to track our opinions on certain stocks.

    - Alex

  • Report this Comment On November 21, 2012, at 7:19 PM, ScottCherf wrote:

    Alex, sorry if I assumed a short position on your or any other contributors part. As far as I'm concerned there is absolutely nothing wrong with saying "i think this stock is overvalued" and consequently shorting the stock. Nothing at all. I certainly appreciate the fact that you folks *always* disclose positions and I regret you might have taken my comment in a way I didn't intend; if you believe in your analysis you should be shorting this stock, if you aren't that's fine too.

  • Report this Comment On November 22, 2012, at 12:43 AM, lynmar79 wrote:

    TMFBiggles, based on Adam being compensated by MF's for his article, and the current MF's newsletter, of which I have a copy, stating MF' s was short DDD, I think there may be an issue for subscribers, and MF's. I hope 3D Systems is following the threads to help them pursue their legal action. I think MF's members were blindsided by this disclosure, and the subsequent articles. To have you slap us in the face again is surprising, but then again, maybe not.

  • Report this Comment On November 23, 2012, at 9:24 AM, suavan1 wrote:

    No worries lynmar79!

  • Report this Comment On November 26, 2012, at 1:55 PM, kthor wrote:

    your analysis of DDD is flawed! even the "Reading a lot of hype around 3-D printers almost reminds me of the scene in Star Trek IV when Scotty uses a Macintosh -- this was in 1986, mind you -- to create a metal from the future in less than 10 seconds." is flawed Scotty showed the guy how to make a 1" glass not metal ( the difference is metal conducts electricity and glass does not)

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