Why 3D Systems Was a 4-Bagger in 2012

3D Systems (NYSE: DDD  ) was the market's second-best-performing stock in 2012, according to Investor's Business Daily. The provider of 3-D printers saw its shares rise 271% during the course of the year, which was almost a four-bagger for investors in this innovative company.

That remarkable one-year return wasn't a surprise to Motley Fool co-founder David Gardner. He recommended the company in his Stock Advisor newsletter in January 2012, and he's extremely enthusiastic about the prospects for 3-D printing technology going forward.

Given that many investors want to learn more about this area, we thought it might be helpful to run David's original recommendation in its entirety on Fool.com. Below you'll find the write-up exactly as it appeared in the January 2012 issue of Stock Advisor.

David Gardner's Top Pick for January 2012:

Suds are spilling out the side of your dishwasher, and you need to replace the little plastic bracket that stops them. No problem -- just get the specs online and print out the part. Or you're designing a new laptop and you want to get a feel for the ergonomics, so you print out a model. Or maybe you need a hearing aid fitted exactly to your ear, so a technician prints out a custom earpiece.

If all that sounds like sci-fi, that's because for most of human history, making things has been a process of subtraction. Michelangelo said, "Every block of stone has a statue inside it, and it is the task of the sculptor to discover it." But technology developed since the late 1980s has made it possible to do additive manufacturing -- laying down only what we want with little or no waste. (Think Michelangelo's David without all the dust.) Sometimes called 3-D printing or rapid manufacturing, the revolution began with my recommendation this month, 3D Systems.

Another Dimension
In 1986, Charles Hull coined the term "stereolithography" to describe a process during which print heads deposit very thin layers of resin in an exact location, building a finished, 3-D object one layer at a time. Hull founded 3D Systems that same year, and he remains the company's chief technology officer.

Additive manufacturing has made great advances in speed, accuracy, and quality since its early days, and it's now being eagerly adopted by many industries that ignored it for decades. That shift is reflected in the company's growth; in the 18 years between 1991 and 2009, revenue advanced at a 10.2% compound annual rate, but in the past two years, top-line growth has jumped to an annual rate of 41%.

Once a way to make a one-off prototype, 3-D printing is now used for all kinds of high-value, low-volume functional parts -- specialty tools, parts for fighter jets, and other objects with complex geometries that would be difficult or impossible to manufacture conventionally. 3D Systems offers parts made not just from a variety of tough plastics, but also waxes, nylons, rubbers, metals, and composites. That makes its offerings attractive to all kinds of industries.

The Future Is Now
Companies' newfound love of additive manufacturing has brought 3D Systems consistent profitability and improving margins. Management believes revenue will hit $400 million to $500 million over the next three or four years -- an inexact target, but one that suggests 24% annual growth in the near future. I think the stock price could double over a similar period. If 3-D printing takes off among individual consumers, even that target could prove conservative.

And no company is doing more to advance that next revolution than 3D Systems. At this year's Consumer Electronics Show, the company launched Cubify.com, a forum where consumers can access design tools, share 3-D designs, and even sell their creations. Objects can either be printed and delivered through 3D Systems' network of service providers on professional machines, or made at home using the company's 3-D printer called the Cube, which retails for $1,299.

Even more tempting for everyday users, 3D Systems' "Kinect-To-Print" application uses Microsoft's (NASDAQ: MSFT  ) Kinect -- yep, the hands-free Xbox game controller -- as a 3-D scanner. That and other tools offer what the company calls "coloring-book simplicity" for creating designs. We think such ease of use will eventually bring 3-D printing into the home, with huge implications for a variety of industries -- and huge profits for 3D Systems shareholders.

Risks and When We'd Sell
3D Systems' chief rival is Stratasys (NASDAQ: SSYS  ) , another excellent company I recommended over at Rule Breakers. While I obviously like both companies, Stratasys uses different technology and has focused mostly on high-end printers. 3D Systems, in contrast, has made a greater effort to bring 3-D printing to consumers. It also has a different business model, focused not just on selling printers and supplies (a classic razor-and-blade model) but also snapping up a number of service companies that create objects on spec. Its large installed base drives a high level of recurring revenue, powering about 70% of sales.

The other significant industry player, Objet Geometries, is reportedly planning an IPO for this year -- something that should bring more attention to the industry, although the company has yet to file. [Editor's Note: Objet ultimately merged with Stratasys in December 2012.] I'm not worried, though; I think this is a case where better, more widely accessible technology lifts all boats. There's room for more than one player here, and 3D Systems has a host of advantages.

3D Systems' acquisitions are another potential risk. While most have been relatively small service providers, the company issued $152 million in debt to pay for Z Corp., which will also add to the $82 million in goodwill it already carries on its balance sheet. The company's strategy of growth by acquisition has also obscured the fact that organic growth has slowed somewhat -- it was about 20% for the first nine months of 2011, versus 27% in 2010. The debt should be manageable, but we'll be keeping an eye on organic growth as well as looking for margins to keep climbing. We're counting on this business to boom, and if it stumbles, we'll print ourselves a pair of walkin' shoes.

The Foolish Bottom Line
Companies are already embracing additive manufacturing like never before, and tomorrow we may all be printing up our own bling. With change coming so fast, it's hard to know what the future of 3-D printing will look like. That's why 3D Systems offers the industry's broadest range of solutions -- high-end systems, low-end printers, service agencies offering a variety of materials and capabilities. Unless the world suddenly goes flat, 3D Systems should continue to drive a powerful -- and profitable -- trend. 

-- David Gardner, January 20, 2012

 

What's Inside Supernova?
3D Systems is a perfect example of the innovative growth companies favored by David Gardner, whose stock picks have resulted in average returns of over 113% in our Stock Advisor service since it launched in 2002. Those returns have beaten the market by more than 87%. David has managed to trounce the market by always being on the lookout for revolutionary stocks and recommending them before Wall Street catches on to their disruptive potential. If you're interested in how David picks his winners, click here to get instant access to a personal tour behind David's Supernova service.


Read/Post Comments (15) | Recommend This Article (41)

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 January 04, 2013, at 5:11 AM, pollution1 wrote:

    'The other significant industry player, Objet Geometries, is reportedly planning an IPO for this year,

    This articloe is just a copy paste of many articles.

    Its outdated, it merged with SSYS already.

  • Report this Comment On January 04, 2013, at 5:40 PM, earlygirlretiree wrote:

    Pay attention. They already said that in the article.

  • Report this Comment On January 04, 2013, at 5:42 PM, johncwick wrote:

    this article is from january 2012

  • Report this Comment On January 04, 2013, at 5:43 PM, johncwick wrote:

    this is tom's article from january 2012

  • Report this Comment On January 04, 2013, at 6:17 PM, wenger2k wrote:

    I feel like I kind-of outsmarted myself on this one. I've been a user and developer of 3d printing technology for several years now and was well aware of the market potential for it but where I messed up which is really my question back to John (and other potential readers) is that I thought the plethora of extremely rapidly emerging low cost and open source 3d printing options was going to largely destroy the margins for companies like 3dsystems and stratasys. I still strongly believe that while there is enormous potential for this technology there is also a ticking clock for their ability to hold the margins against the onslaught of up and comers.

    How long before these companies have to collapse margins to compete with much lower priced competitors. A year ago all of the various low cost/open source providers of the 3d printing were using plastic extrusion technology but as of now there are several stereolithograpy companies that are offering very impressive printers for well under 5k. When & how will this impact the proprietary players?

  • Report this Comment On January 04, 2013, at 10:00 PM, ddillan wrote:

    All due respect, I did follow the Fool thinking and invested in DDD, but I also went with VMW, WPRT and CLNE which more than erased my gains in DDD.

    I understand I am responsible for my own investment decisions, but the Fool was just as excited about these 3 companies as DDD, more so in the case of VMW.

  • Report this Comment On January 05, 2013, at 5:37 AM, eltarik wrote:

    I also went with Autodesk and HP along with DDD and it took some time for the huge losses in both the former shares to be compensated with the profits in DDD. So even though the Fool was right on the money with DDD (and incredibly so), it was completely wrong on all the other 3D printing related company recommendations. At least HP give out a nice dividend regularly but I have lost 45% of value on my HP investment and about 25% value on my Autodesk investment.

    Anyone know if DDD is going to payout any dividends any time soon by the way?

    Many thanks.

  • Report this Comment On January 05, 2013, at 2:14 PM, bobbyk1 wrote:

    You guys complaining about losses should take a little responsibility.Just because the Fool calls it a buy doesnt mean you hold it forever.If you cant manage your accounts put your money in a mutual fund.

  • Report this Comment On January 05, 2013, at 9:14 PM, richmacmf wrote:

    Thanks MF! Great find and recommendation!

  • Report this Comment On January 05, 2013, at 9:20 PM, mikecart1 wrote:

    It is easy to look back and pick a best pick among many picks that aren't so great.

  • Report this Comment On January 07, 2013, at 5:55 AM, ddillan wrote:

    You miss the point bobbyk1. (read "I am responsible for my own...."). Simply pointing out that while DDD was a great pick by MF, they had some pretty good misses too.

  • Report this Comment On January 07, 2013, at 12:59 PM, mclaugph wrote:

    What's the difference between this pitch and your advisor/broker pitching something to you over the phone (or worse, just getting a spam)?

    It's all well and fine for MF to make the pitches but I think for all the touting of moneyballing the picks, they sure seem to highlight all the multi-baggers and ignore (or downplay at best) those where people lose money.

    Ultimately, it is your money and responsibility...but given that these 20/20 hindsight pitches are made to market and sell their subscription services, I'm ok with giving people SOME leeway to complain. If you buy something are aren't totally happy, you complain.

    Aren't they paying for the services/picks to save time vs. all the due diligence they'd have to do themselves?

    ----

    One last thought...

    "Suds are spilling out the side of your dishwasher, and you need to replace the little plastic bracket that stops them. No problem -- just get the specs online and print out the part."

    ...Maybe this is the reality in 5 years, but I'd think it's cheaper to buy the actual part online vs. buying the printer, "ink", and specs. Currently, my experience is (after shipping) it's cheaper to drive down the street to the appliance parts store and buy the part.

    I'm skeptical many people will buy these 3-D printers. Most people I know have 2-3 deskjet printers they've accumulated over time, rarely use, and are happy to give away. In the future I think most people will go to Kinko's with their "specs" and pay a fee to use a 3-D printer.

  • Report this Comment On January 08, 2013, at 11:27 AM, NickD wrote:

    DDD lost me 72k today.

  • Report this Comment On January 09, 2013, at 8:48 PM, cifmiller wrote:

    And made back most of it today if you weren't a moron and sold it. It's pretty pathetic you all are judging your returns after one year or less. Motley fool is not a trading site. Especially the guy talking about WPRT and CLNE. Natural Gas is no where near ready, but its coming in my opinion. It could take years though, especially the infrastructure CLNE is trying to build. I like the name "iseeksafestocks" while your investing in such a volatile growth stock as DDD, at its all time I might add.

  • Report this Comment On January 09, 2013, at 9:14 PM, TMFBlacknGold wrote:

    Hmmm...

    The Kinect-to-Print app doesn't have fine enough resolution to really make a big deal in the home. The resolution of Kinect itself could always get better, but it is a severely limiting factor. So its not exactly noteworthy (yet).

    Cheers,

    TMFBlacknGold

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