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3D Systems Proves It's No Gimmick

http://www.fool.com/investing/general/2012/10/26/3d-systems-proves-its-no-gimmick.aspx

Rich Duprey
October 26, 2012

I've been beating the drum for some time now that the $1,000 price barrier will be an inflection point for 3-D printer maker 3D Systems (NYSE: DDD  ) . It was at that level that Hewlett-Packard (NYSE: HPQ  ) soared into the stratosphere with ink-jet printers, catapulting the company to enormous market share that it has really yet to relinquish. As 3D Systems closes in on that price, it looks like it's about to take off, too.

Yesterday's earnings report revealed sales surged 57% in the third quarter to $90.5 million while profits doubled. Organic growth was up 26%. The number of 3-D printing units actually sold more than doubled, which doesn't include its new Cube printer, while printing supplies jumped higher, as did service-related revenue. That underscores the significance of 3D Systems' installed base of printers as well as the price point they're offering them at. It now has a backlog greater than $9 million.

Investors Business Daily recently reported the Consumer Electronics Association says sales of 3-D printers will grow at a compound annual growth rate north of 31%, nearing $5 billion by 2017 as demand for the technology expands across all industries. 3-D Systems looks poised to capture a large portion of those sales.

3D Systems snapshot

Market Cap

$2.3 billion

Revenue (TTM)

$289 million

1-Year Stock Return

111%

Return on Investment

7.4%

Estimated 5-Year EPS Growth

19.6%

Dividend and Yield

N/A

Recent Price

$40.85

CAPS Rating

*****

Source: FinViz.com. N/A = not applicable; 3D Systems doesn't pay a dividend.

While 3-D movies have proved to be little more than gimmickry for the industry, 3-D printers are proving they hold real value. It's obvious 3D Systems sees the logic of driving down prices for its systems, even if it means the printers themselves offer lower margins. Yet despite a higher portion of its revenue coming from these lower-margin units, they've still managed to expand gross margin sequentially and by a full 350 basis points over the year-ago period to 51.8%.

Cut, print!
The key has been low-priced printers that are able to consume materials at comparable levels to higher-priced units. Like every other razor-and-blades business, the real money is made on the consumables. It's how HP, Lexmark (NYSE: LXK  ) , and Canon (NYSE: CAJ