3D Systems Corporation Earnings: Has the 3-D Bubble Popped?

On Tuesday, 3D Systems (DDD 1.17%) will release its quarterly report, and investors have endured a gut-wrenching plunge in the stock price that has lopped off nearly half of its value since the beginning of the year. Rivals Stratasys (SSYS -0.30%) and ExOne (XONE) also seen substantial declines, raising the question of whether the entire 3-D printing industry got itself into bubble territory or whether 3D Systems now offers bold investors a chance to buy shares at what in hindsight will be a bargain price.

New industries always go through growing pains, and the volatility in the share prices of 3D Systems, Stratasys, ExOne, and their peers is consistent with the difficulty investors have in evaluating the prospects of their respective businesses. With so much of their potential far in the future, the smallest of setbacks now can have ripple effects years down the road that can dramatically affect the value of their businesses. The main question 3D Systems faces is whether it can keep growing fast enough to build up a first-mover advantage that will defend its turf against future entrants to the space. Let's take an early look at what's been happening with 3D Systems over the past quarter and what we're likely to see in its report.

Source: 3D Systems.

Stats on 3D Systems

Source: Yahoo! Finance.

Will 3D Systems earnings surprise investors?
Analysts have gotten increasingly downbeat about 3D Systems earnings in recent months, chopping first-quarter estimates by more than a dime per share and cutting their projections for the full 2014 and 2015 fiscal years by about a third. The stock has suffered the consequences, plunging 44% since late January.

There's no doubt that 3D Systems has continued to see impressive growth in its core business. In its fourth-quarter results, 3D Systems showed revenue growth of 52% compared to the year-ago quarter, and even after factoring in acquisitions, organic sales growth soared 34%. Yet investors paid close attention to CEO Avi Reichental's discussion of how even those growth rates were slower than 3D Systems wanted to see, and they seemed dissatisfied with 2014 revenue guidance for 30% organic growth, especially in light of the fact that 3D Systems had issued discouraging preliminary results earlier in the month.

Source: 3D Systems.

One of 3D Systems' biggest challenges is figuring out which 3-D printing niche to focus its efforts on. Consumer-printer sales have grown the most, but 3D Systems had even higher expectations for consumer sales than the market delivered. Meanwhile, health-care applications and metal printing have done better than 3D Systems projected, and with Stratasys, ExOne, and most other players having a substantial presence on the industrial-printing side of the business, 3D Systems needs to make a strategic decision about whether it wants to remain a 3-D printing generalist or drill down on particular applications.

But the bigger long-term threat to 3D Systems will come from competitors that don't even exist yet. Governments and sovereign wealth funds have seen the potential of 3-D printing, and especially in Asia, countries with huge interest in manufacturing like China and Singapore have announced investments toward boosting 3-D printing technology and expertise. That explains the urgency that 3D Systems, Stratasys, and other U.S.-based companies have in growing as quickly as possible, as government support for overseas rivals could leave them fighting an uphill battle if they can't get as big a lead as possible over their future competition.

Moreover, 3D Systems shareholders need to be prepared for the impact of general market turbulence on the stock's price. High-growth stocks like 3D Systems always move more violently than the overall market, and lately, traders have targeted momentum stocks like 3D Systems as having risen too far too fast. In addition, if a company decides it needs to raise capital to grow further, then dilution from secondary offerings have sent many 3-D printing stocks into short-term tailspins.

In the 3D Systems earnings report, watch to see not just what the growth numbers look like but also what strategy 3D Systems intends to follow in order to bolster growth further. Long-term investors must focus more on fundamentals than on share-price volatility, but 3D Systems needs to show how it can cash in on the potential of proprietary printing-material sales and new applications in order to help the stock bounce back.

Click here to add 3D Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.