Does 3D Systems Corporation Have a Better Business Model Than Stratasys, Ltd.?

Although 3D Systems (NYSE: DDD  ) and Stratasys (NASDAQ: SSYS  ) are the two biggest players in the 3-D printing space, when it comes to how they operate, they couldn't be more different.

Of the two, 3D Systems is most certainly the aggressor, leaving no stone unturned as it pursues what it believes is an "unprecedented" business opportunity happening in 3-D printing right now. As a result, 3D Systems has made well over 40 acquisitions in the last three years to broaden its portfolio and help solidify its lead over competitors.

Stratasys, on the other hand, has taken a more conservative and strategic approach to its market opportunity, but when it does make a move, it's impossible to miss. In the last couple of years, the company successfully merged with Objet, and it purchased MakerBot for potentially as much as $604 million, contingent upon how the consumer-focused 3-D printing company performs this year.

While both approaches to business have their strengths and weaknesses, 3D Systems' approach has recently shown to be more adaptable than Stratasys'. But does that make 3D Systems a better business to own over the long term?

Keeping those bolts secured
Because of its acquisitive nature, one of 3D Systems' greatest business challenges is how well it can manage and integrate all of its purchases. With all those moving parts, the company definitely runs the risk of mismanaging these diverse businesses, which could result in an undesired return on investment. To mitigate this risk, 3D Systems needs a solid set of operational processes in place in order to effectively "bolt on" any acquisitions.

The other part of the equation is how quickly 3D Systems can bring an acquisition to market. This question, of course, depends on the type of acquisition, and whether or not 3D Systems already has the existing technology and systems in place to handle it. Investors recently got a glimpse of how fast 3D Systems can turn two acquisitions into two new product categories.

Quick delivery
The two acquisitions I'm referring to are Figulo, a 3-D printing ceramics company, and The Sugar Lab, a 3-D printing sugar company. It was only last month that 3D Systems purchased Figulo, but it has since unveiled a 3-D printer that prints ceramics at CES 2014, the CeraJet, which has a sticker price under $10,000. Meanwhile, The Sugar Lab was purchased back in September, and 3D Systems has already debuted two 3-D printers that can print in sugar and chocolate, the ChefJet and ChefJet Pro. Both the CeraJet and the ChefJet series are expected to be available sometime in the second half of this year.

3-D printed sugar cubes. Source: 3D Systems

The power of 3D Systems' model is that is can buy a company and quickly turn it into a business in short order. Granted, part of the reason for such quick turnarounds in these cases has to do with 3D Systems already having the material jetting 3-D printing technology in place, so it was just matter of recalibrating the existing platform to accommodate new materials and binders. Still, I think it shows how efficiently 3D Systems can implement acquisitions and create new opportunities for itself.

Peeling back the layers
On the surface, it's easy for investors to say that 3D Systems has a more adaptable – and therefore better suited – business model for the 3-D printing industry, an industry that's currently experiencing rapid change and growth. While this may be the case today, it's important to understand that a significant portion of 3D System's long-term adaptability will ultimately depend on its research and development spending.

Currently, 3D Systems has seven different 3-D printing "engines," or primary technologies, whereas Stratasys has two different 3-D printing engines. Without enough R&D investment in each technology, 3D Systems runs the risk of spreading its resources too thin and losing its competitive positioning to the marketplace. Theoretically, Stratasys can afford to spend less than 3D Systems on total R&D, but it could actually manage to allocate more resources into each of its 3-D printing technologies. Over the long term, this could create an opportunity in which Stratasys would leap ahead of 3D Systems in terms of innovation.

Additionally, 3D Systems' business model requires significantly more R&D spending just to maintain itself, which could ultimately end up hurting its longer-term profitability if long-term-revenue growth does not outpace long-term R&D growth. Just recently, the company announced a plan increase its R&D spending by 75%-100% in the coming years.

Looking ahead
After 40-some-odd acquisitions in the last three years, 3D Systems appears to have built out the framework to quickly bring new 3-D printing applications to the marketplace. However, this framework is built on seven different 3-D printing engines, making it more financially and operationally burdensome to drive innovation than Stratasys' nimbler two-engine approach. With more moving parts, 3D Systems' business model has more points of potential failure and, as a result, it could ultimately prove to be a riskier investment than Stratasys.

As far as which business has the better model? Based on current market values, investors believe that 3D Systems' business model is worth about $3 billion more than its competitor's. However, both companies are expected to earn the same $669 million in revenue in 2014 and trade with a forward P/E between 55 and 66. For roughly the same revenue and forward P/E ratio, I don't think 3D Systems' business model deserves a $3 billion premium over Stratasys. In other words, Stratasys shares could currently be undervalued on a relative basis and this may present a buying opportunity.

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