3 Major Risks for 3D Systems Corporation

Although 3D Systems (NYSE: DDD  ) may be the biggest, most diversified, 3-D printing company around, it's not immune to risks that could negatively affect its business. If you're a 3D Systems investor, it's important to familiarize yourself with any major risks that could materially change your long-term-investment thesis. This exercise will likely prove to be valuable during time of negativity, not to mention that it challenges any confirmation bias you may have.

Spread too thin
At last count, 3D Systems has a total of seven different 3-D printing engines, or different types of 3-D printing technologies in its portfolio. This has made the company extremely well equipped to adapt to the rapidly changing environment of 3-D printing and gives it the opportunity to compete in more 3-D printing verticals than any of its competitors.

However, having too many 3-D printing engines makes the company susceptible to becoming a jack of all trades, and a master of none. As a result, 3D Systems has to carefully allocate its resources in terms of not only research and development spending, but also human capital. From an operational perspective, too many product divisions could create unforeseen friction, conflict, and inefficiencies across the company.

A seven-engine car needs a lot more work
Because 3D Systems has seven different 3-D printing engines, its R&D liability is far greater than competitors, putting it at a serious disadvantage compared to Stratasys (NASDAQ: SSYS  ) , which offers only two different 3-D printing engines. Hypothetically, if $100 of R&D spending was split equally across their respective printing engines, about $14 would be allocated toward each of 3D Systems' seven printing engines, and $50 would go toward each of Stratasys' engines. In this instance, 3D Systems would need to spend about 3.5 times more per printing engine to match the same level of R&D that Stratasys is investing into each of its engines.

Not only does this put pressure on 3D Systems to invest more into R&D than Stratasys, it creates a potentially troubling situation where R&D becomes a runaway expense that erodes earnings potential. This is especially true if 3D Systems wants to continuously innovate and invest in each of the 3-D printing verticals it competes in. In addition, 3D Systems' management has a much tougher job determining how to effectively allocate its R&D spending across its printing engines than Stratasys' management team does.

A cancerous sign
As former Costco CEO Jim Sinegal once put it, "Culture is not the most important thing -- it's the only thing." Undoubtedly, a business that creates an enduring culture with a higher sense of purpose has a huge competitive advantage over its peers. The reason being, culture-driven organizations put employees and the company's higher purpose before its profits, creating an environment that empowers the business to achieve amazing operating results over the long term. For a company that's working to solidify its long-term positioning in the 3-D printing industry, it's extremely important for 3D Systems to have its employees and company's purpose in alignment.

According to anonymous employee data compiled by Glassdoor, 3D Systems employees are "dissatisfied," rating the company 2.2 out of five stars. Additionally, only 17% of employee reviews approve of CEO Avi Reichental's job. It's worth noting that only 19 employees have rated their work experience at 3D Systems and only 12 have rated Avi Reichental. Still, these early indications call for keeping an eye on this potential structural issue, because a culture where employees are dissatisfied often creates a ripe breeding ground for businesses that deliver subpar operating results over the long term.

What this means for investors
When a stock like 3D Systems has had an incredible run based on its future growth potential, its current valuation becomes stretched by nearly every metric imaginable. As a result, the need for the company to execute almost flawlessly has grown increasingly stronger. Should there be a misstep or two along the way, the bullish sentiment about 3D Systems will likely crater, and investors are almost certain to face losses. Being aware of these risks will help you determine whether or not action is warranted during times of negativity.

As a 3D Systems shareholder, these risks currently aren't enough of a threat for me to take further action today, but it's definitely enough of a reason for me to not increase my position at current prices.

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Read/Post Comments (8) | Recommend This Article (8)

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 29, 2014, at 3:46 PM, dion2727 wrote:

    Who picked the 12 and why?????. Do the same f

    or all the listed stocks in the market,grade them,anayze them,chart them,short them,buy them,option them,etc What a stupid arguemernt.

  • Report this Comment On January 30, 2014, at 6:52 AM, Pietrocco wrote:

    Steve, as you correctly state, DDD has a stratospheric valuation.

    Unless they are going to own the *D printing market for the next 10 years, or they are massively overvalued.

  • Report this Comment On January 30, 2014, at 10:39 AM, hookturn wrote:

    Well I disagree with your assessment. But I did find some humor in it, especially the part "culture-driven organizations put employees and the company's higher purpose before its profits," Anyone know of a highly profitable company that does this? Come-on Man, to quote a great commentator. Companies are all about profit not about employees as we've seen since the beginning of this recent depression. Long term investors in 3D systems are not the ones who run every time some half backed analyst says they're a poor company to invest in. Savvy investors are well aware of the nay-sayers and the manipulators like Citron and take advantage of these dips. I originally purchased at 32, sold at 93 and repurchased after Citron's "brilliant" assessment, at 74!! Thank you Citron, hahaha. 3D may have multiple printers but the basic engine runs the same. Maybe this is why they will be the leader in this 'not new' technology for years to come

  • Report this Comment On January 31, 2014, at 9:20 PM, Zalhari wrote:

    Well, I bought it because you guys said to buy it. I can complain about how well its done. I guess I can't be angry either that you guys are giving this warning (but I am). What you say sounds plausible but its wrapped in analogy. You guys talked many people into this, so I think you owe it to us all to do little investor advocacy and take it up directly with 3D. Quite frankly culture is important and there are many avenues to driving improvement in this area. Its really not that difficult once you have a plan. I work for a company that acquires dozens of businesses a year, and their focus in this area is consistent and improving....always improving. They need to get with it. Let us know the response you get when you draft a letter to the company demanding to know how they plan to address this going forward. I paid money for my subscription and I want action, now. Thanks for the warning shot, and also thanks in advance for doing something about it. I can't wait to read their response. If they fail to respond then I REALLY look forward to hearing about that.

  • Report this Comment On February 01, 2014, at 9:23 AM, 3Dexplosion wrote:

    Google is going to make 3D Systems more successful than it would be on its own with Project Ara.

    Here is a recent Motley Fool article on this topic:

    http://www.fool.com/investing/general/2014/01/31/what-google...

    "....The goal of Project Ara is to create a large-scale 3-D printing manufacturing platform capable of producing customizable open-source modular smartphones..."

  • Report this Comment On February 03, 2014, at 10:23 AM, jcp10649 wrote:

    this is an irresponsible, fear inciting article based on nothing - literally nothing. any experienced, knowledgeable business leader would not present a conclusion on organizational culture based on 19 employees, without providing total employee count.

    this should break the Fools Rules if they are to be meaningful

    as one commenter stated MF has recommended DDD, so why publish such a poor paper?

  • Report this Comment On February 06, 2014, at 3:41 AM, ramsey2000 wrote:

    jcp, you missed the point of Heller's article. The key takeaway from Heller's article is that DDD has what most would refer to a strategic & structural flaw in its business model. 7 engines is too much for any organization to manage. Even 3 engines would be very difficult, but manageable in the short-run. Clearly, management lacks the direction and conviction to embrace 1 or 2 engines and place its bets on them. The result, as Heller points out, is that the R&D budget has to be spread thin, effectively guaranteeing the same long-run failure that would result if management were to narrow its focus on 2 or 3 engines. The absence of such focus also results in confusion and scatter among employees, which in turn results in poor morale.

    Yes, one can argue that 19 employees opinions can be disregarded. I suppose your implicit reasoning is that the 19 count, by any measure, is statistically insignificant. True. But if you drill down in the logic a bit further, you will note that these 19 individuals had the gall to stand up and be counted. If you buy into my reasoning, then you will agree that there must be many more who are disenchanted. Clearly, these 19 individuals do not work in a vacuum and they must experience the same sentiment around them for them to hold such a strong opinion to want to stand up and be counted. For what its worth, each of these individuals could represent the sentiment of 10 individuals. So, using my voodoo math, we have 190 unhappy individuals. Toss out, 20% for duplicate counting. That leaves you with 158 dissatisfied employees. Now, I don't know the employee count at DDD, it will have be 2000+ for me to dismiss the opinions of these 19 individuals. I doubt that DDD has 2000+ employees at this time. Hence, the 19 (highly) dissatisfied employees who took the time to voice their opinion on Glassdoor is significant, even it is statistically irrelevant. Today's beating of DDD vindicated Heller's posits.

    This is a true fundamental analysis. Corporate profits are only the outputs. Culture and morale (along with land, labor and capital) are the true inputs. Then recall that "garbage in, garbage out." Hopefully, this will help you understand where Heller was going with his observations.

    Thanks Heller. You were right on the money!! I'll be watching your posts.

    On a sidebar, each and every 3D play was in highly overbought territory on a "technical" basis. In such instances, all it takes is a simple sneeze and they all catch the flu!!! We saw it today.

  • Report this Comment On February 06, 2014, at 3:42 AM, ramsey2000 wrote:

    The result, as Heller points out, is that the R&D budget has to be spread thin, effectively guaranteeing the same long-run failure that would result if management were to narrow its focus on THE WRONG 2 or 3 engines.

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