3D Systems Corp: How Does Its Valuation Stack Up to Those of Competitors As We Enter Q2?

The 3-D printing stocks, which were red-hot in 2013, have been ice cold in 2014. While all the pure-play 3-D printing stocks are down in 2014, ExOne and 3D Systems Corp. (NYSE: DDD  ) have been the sector's two biggest losers, plummeting 42% and 36%, respectively. Voxeljet, Stratasys, and Arcam are have lost 33%, 22%, and 16%, respectively, of their values since the year began.

Richly valued stocks, subpar earnings results
It's not surprising investors have sent shares of the 3-D printing stocks tumbling this year. The pure plays have now all reported their fourth-quarter and full-year 2013 earnings results, along with their forward guidance, and the sector's results have been weak for such highly valued stocks. (Here are articles highlighting earnings for 3D Systems Corp., Stratasys, ExOne, Arcam, and voxeljet.)

While most of the companies reported strong revenue growth, none of them impressed with earnings, and ultimately, it's the bottom line that drives stock price performance. The reasons for the subpar earnings vary somewhat, but the key reason is essentially the same among the two leading players, 3D Systems Corp. and Stratasys. Both companies, most especially 3D Systems Corp., are pursuing turbocharged growth strategies designed to capture as much market share as possible, as fast as possible. These companies plan on sacrificing short-term profits for long-term growth potential. Not only has 3D Systems been gobbling up many smaller companies for years, but it moved into a major teaming mode last year. In 2013, it partnered with a wide range of leaders in diverse industries, including Google, Hasbro, and Hershey Company.

Stratasys hasn't been as aggressive in its growth strategy, likely because it's been busy digesting its megamerger with Objet. Based upon information the company has released this year, however, investors should expect Stratasys' growth game to kick into a higher gear.

A major reason these companies are in a race to capture market share relates to material sales. The more 3-D printers a company installs, the more reoccurring revenue from material sales it should generate, as most printers use proprietary materials. Additionally, "consumables" sport higher profit margins than other segments of these companies' businesses, so they have an outsized effect on earnings. 

Valuations at the start of 2014 vs. now
Given the pummeling the 3-D printing stocks have taken in 2014, their valuations have generally come down rather substantially since the start of the year. Here's how the 3-D printing stocks stacked up by common valuation measures and a couple other key metrics, as of Jan. 3.

Company

Market Cap

Annual Revenue (Millions)

Price/Sales

P/E

P/E (FRW)

Operating Margin (TTM)

Profit Margin (TTM)

3D Systems

$9.9B

$460.2

21.0

209

75.3

18.7%

9.6%

Stratasys

$6.7B

$400.5

16.3

N/A

58.3

(1.1%)

(7.3%)

ExOne

$962.6M

$41.5

21.7

N/A

155.6

(0.7%)

(5.7%)

Arcam

$585.9M

$29.5

20.2

173

N/A

11.5%

11%

Voxeljet

$729.8M

$13.0

55.9

N/A

N/A

0.6%*

(2.0%)*

Sources: Yahoo! Finance; voxeljet's third-quarter earnings report.
*For nine-month period through Sept. 30.

Here's how they stack up, as of March 28.

Company

Market Cap

Annual Revenue (Millions)

Price/Sales

P/E

P/E (FRW)

Operating Margin (TTM)

Profit Margin (TTM)

3D Systems

$6.1B

$513.4

11.8

132

48.8

15.8%

8.6%

Stratasys

$5.1B

$484.4

10.6

N/A

35.6

(2.5%)

(5.6%)

ExOne

$508.3M

$39.5

13.2

N/A

110.1

(14.4%)

(16.4%)

Arcam

$562.4M

$30.2

18.4

216

N/A

7.3%

7.7%

Voxeljet

$409.5M

$16.1

25.4

N/A

N/A

(17.2%)

(23.2%)

Sources: Yahoo! Finance; voxeljet's fourth-quarter earnings report.

As you can see, stock valuations have dropped significantly across the board, with the exception of Arcam. 3D Systems Corp., in fact, is now more reasonably valued than Arcam on both a price-to-sales and a price-to-earnings basis. The two companies are quite different, as 3D Systems is much larger and offers the sector's broadest range of 3-D printers and materials, while Arcam exclusively focuses on metals printers for the aerospace and medical implant industries. They do, however, share one key commonality: they're both profitable from a GAAP standpoint.

3D Systems Corp.'s stock valuation is now more in line with Stratasys' valuation, at least from a P/S basis. At the start of the year, 3D Systems sported a nearly 30% premium relative to Stratasys, whereas it's now just 11% more richly valued. While one could argue that 3D Systems deserved to be more highly valued because it's profitable, whereas Stratasys is not, a 30% premium seemed quite steep. It's important to remember that Stratasys has historically been profitable; its merger with Objet negatively affected profitability, which was to be expected. Importantly, Stratasys is expected to return to profitability this year. 

Foolish final thoughts
There's no guarantee that the 3-D printing stocks will resume their upturns soon (or at all, for the matter). However, investors with long-term horizons who believe in the earnings growth potential of one or more of these companies might find current stock prices present attractive entry points. I think it's likely that we could see further divergence among the stock price performances within the sector as the year continues. If this proves the case, prudent stock selection becomes even more important. 

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