3D Systems or Stratasys: Which 3-D Printing Company Had the Best Q1 Results?

Now that the two leading 3-D printing companies, 3D Systems (DDD -0.86%) and Stratasys (SSYS -0.20%), have reported first-quarter 2014 earnings, it should prove enlightening to directly compare their results. One company isn't likely to emerge the clear winner, as each has unique strengths. Besides, qualitative factors are just important as quantitative ones, and future results are more important than current ones. With these caveats in mind, our findings from a face-off between these 3-D printing sector bigwigs on key metrics should nevertheless prove valuable to some in making investing decisions. 

First, we'll look at key quarterly stats, then full-year 2014 guidance, and finally valuations. 

Total revenue growth 

Source: Q1 earnings reports.

Details on revenue growth by segment can be found in my articles on 3D Systems' and Stratasys' first-quarter results.

ADVANTAGE: Stratasys

Organic revenue growth

Source: Q1 earnings reports.

ADVANTAGE: Stratasys

It's been especially important for investors to focus on 3D Systems' organic growth rate, as the company has been the Pac-Man in the 3-D printing space, gobbling up many smaller companies. While turbocharged growth-by-acquisition strategies can present some concerns, 3D Systems has apparently done a good job of incorporating acquisitions into its fold.

While 3D Systems' organic growth was solid at 28%, it was down considerably from the previous quarter's 34%. Quarterly metrics will vary for all kinds of reasons, so it's usually best to compare metrics to averages. 3D System's organic growth averaged 29% in 2013, so the 1% dip in the first quarter isn't a concern. That said, this key metric should be monitored going forward.

Stratasys' growth M.O. has been markedly different, as the company has made significantly fewer acquisitions, but has generally gone for larger, leader-in-class businesses when it's been a buyer. Stratasys merged with Objet in 2012, which netted the company Objet's patented PolyJet technology. Notably, the first quarter of 2014 marked Stratasys' return to profitability on a generally accepted accounting principles basis following this merger. Stratasys acquired MakerBot, a popular manufacturer of desktop 3-D printers, in 2013. This buy gave Stratasys entrée into the consumer market, though MakerBot's' products are also popular with "prosumers" (professional consumers who use them in their small businesses), and are even used for prototyping by engineering staff in some larger companies.

Stratasys has recently boosted its growth game -- a necessity to keep up with 3D Systems -- and announced in the first quarter that it would acquire three companies. Two of the acquisitions were service bureaus -- including Harvest Technologies, the largest independent 3-D printing services operation in North America -- and one a materials developer. Meanwhile, 3D Systems strengthened its health-care portfolio by announcing it planned to scoop up Medical Modeling. 

Adjusted earnings 

Source: Q1 earnings reports.

There's no clear-cut winner here. It's surely a plus that Stratasys' adjusted earnings-per-share growth dipped less than 3D Systems' did. However, both companies have ratcheted up their growth games lately, and 3D Systems' greater dip could indicate that it's spending more on activities intended to fuel long-term growth than is Stratasys. The million-dollar question, of course, is how successful both companies will be with these strategies. 

GAAP earnings 

Source: Q1 earnings reports.

A similar thought as above applies with respect to the "winner" here. Again, Stratasys has returned to profitability on a GAAP basis following its marriage with Objet in 2012. While this is a positive in and of itself, there's another plus: Investors should get a more accurate view of how the combined entity is performing going forward.

GAAP gross margin

Source: Q1 earnings reports.

ADVANTAGE: Stratasys.

Stratasys' big leap results from the combining of operations and research and development from the Objet merger being essentially complete. While 3D Systems' margin edged down from last year's first quarter, as well as from the company's 2013 average of 52.1%, it's too small a drop to be meaningful.  

R&D spending

Source: Q1 earnings reports.

ADVANTAGE: 3D Systems

Spending on research and development is surely a good thing, though a company's spending level doesn't always equate to the effectiveness of its efforts.

While 3D Systems is now spending a bit higher a percentage of its revenue on R&D than is Stratasys, this is a new development. Stratasys' R&D level has been consistent at about 10% of revenue for some time, while 3D Systems recently significantly boosted its spending level. This shouldn't come as a surprise, given that Stratasys has largely been growing organically, while 3D Systems has relied on acquisitions for a large chunk of its growth. Boosting R&D was a must for 3D Systems if it wants to maintain its leadership position and fulfill its end of the many partnership agreements it has inked in the past year. These include teaming with a wide variety of industry leaders, including Google, Hasbro, and Hershey.

2014 guidance

3D Systems' guidance at the midpoint implies an adjusted earnings decrease of 4.7% on revenue growth of 36.6%, while Stratasys' guidance implies adjusted EPS growth of 19.6% on revenue growth of 37.7%. We can't make a good comparison here, as the two companies are in different positions. 3D Systems' acceleration of its growth game will naturally result in decreased earnings. Stratasys has the Objet wrench thrown in here; the positive effect on earnings of this merger now being essentially completed will counterbalance the negative effect on earnings due to the company's ramped-up spending for long term growth.

Valuations

Source: Yahoo! Finance.

ADVANTAGE: Stratasys

There are two main caveats here. First, both forward price-to-earnings ratios and five-year PEGs, or P/Es-to-growth, are based on analysts' estimates of future results. The 2015 projections used in the forward P/Es will likely turn out to be quite accurate, but I would not put much stock in estimates five years out. It's impossible to know what the competitive landscape will look like in five years. Second, these aren't the only valuation measures; I'm a big believer in cash flow valuations -- more specifically, operating cash flow for high-growth companies -- though these comparison wouldn't be very telling at this point due to the negative effect of the Objet merger on Stratasys' cash flow.  

Foolish final thoughts
Stratasys seems to be the overall "winner" here, but investors should keep in mind the caveats previously mentioned. Namely, we only looked at some current quantitative metrics, whereas qualitative ones matter just as much. Additionally, one quarter is just one quarter, and long-term investors should never place too much emphasis on such a short time period.