As the largest manufacturer of 3-D printers, with the broadest portfolio of printers in the industry, 3D Systems (NYSE: DDD ) is at the leading edge of a disruptive technological revolution. However, despite years of earnings growth, 3D Systems' share price has risen even faster, and today the company sports a sky-high valuation. To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on the company's shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. Today, you can get a sneak peek at our report, in which we break down 3D System's corporate structure and the prospects for each of its business segments.
3D Systems operates primarily in three business segments: Printers, print materials, and services. (A smaller cross-cutting health care segment incorporates elements of all of 3D Systems' products, focusing specifically on the health care industry.) Through the first nine months of 2012, revenue growth was strongest in the print services segment, but the incredibly high margins in print materials made that segment the largest contributor to gross profits:
(% of total)
|% of Gross
First nine months of 2012
In its printer segment, 3D Systems designs, manufactures, and sells the world's broadest range of 3-D printers, ranging from high-performance models for large-scale production use costing nearly $1 million to affordable desktop machines for hobbyist use costing as little as $1,300. Customers include research & development teams, medical offices, architecture and design firms, and amateur enthusiasts.
3D Systems has done more than any other company to democratize 3-D printing technology by aggressively bringing down the cost of 3-D printers. This focus on putting out a wide portfolio with a price point for any consumer has brought down gross margins for the segment, and likely will continue to do so as 3D Systems pushes the envelope toward commodification, but in the long-term it's a good strategy. If 3D Systems can continue to build a massive installed base of customers, it can benefit tremendously by selling its proprietary print materials.
Similar to the printer-and-ink model, 3D Systems also sells over 100 different materials to be used in its products, including wax, plastics, nylon, rubber, metals, and composites. This wide variety of materials allows 3D Systems' printers to create products with applications as diverse as dentistry, aeronautics components, athletic gear, and consumer products like phone cases.
Material sales provides a reliable, recurring revenue source with high and growing margins and major barriers to entry. In fact, to protect this market, 3D Systems has begun using RFID technology in its printers and print material cartridges, ensuring that its machines will only operate when using 3D Systems' own materials.
Some customers have 3-D printing needs that are small enough or inconsistent enough not to merit purchasing a printer. For them, 3D Systems offers integrated solutions to design, build, and deliver parts on-demand. As awareness of the technology has spread, revenue has grown quickly in this segment, driven by a series of small bolt-on acquisitions that have exposed 3D Systems to many new customers in new geographies.
Many product designers will not make a decision to buy a printer without being convinced of the quality of the finished products and the capability of the technology. Print services offer a low-commitment way to experiment with 3-D printing, and are therefore an important part of rapidly expanding awareness of additive manufacturing and growing the number of commercial applications as designers find new uses for the process.
Long-term, however, the services business will suffer from extremely compressed margins due to the inability of any firm to establish a competitive advantage. Since 3D Systems sells the machines it uses to provide the service, any motivated entrepreneur could simply buy a 3D Systems printer and offer an identical service, competing on price alone. 3D Systems' serial acquisitions of service providers has allowed the company to enforce some pricing discipline, but this method probably isn't sustainable as the industry matures.
We hope you enjoyed this sample of our new premium research report on 3D Systems, which also includes a breakdown of the company's risks and opportunities, the most important areas investors need to watch, and three key reasons to buy or sell the stock. To gain access to the complete report and a full year of analyst updates, click here and keep reading now.