The 3D printing industry has been quietly rebuilding following the incredible run-up in 2013 that ended with an equally spectacular collapse. Turns out additive manufacturing technology wasn't quite ready for prime time. Judging from continued losses around the industry, there's a ways to go yet. But that didn't stop Wall Street and investors from rewarding 3D Systems (DDD 1.07%) with a 67% stock gain in August.
The industry leader reported second-quarter 2018 adjusted earnings that were better than analysts had expected. Yet while the additive manufacturing powerhouse continues to expand its core offerings and leverage high-margin business opportunities in healthcare, operating income and cash flow were lower in the first half of this year than in 2017. Looking ahead, is there anything that might make 3D Systems stock a buy?
Image source: Getty Images.
By the numbers
Three numbers ruled the company's second-quarter 2018 earnings report. First, adjusted EPS came in at $0.06, which, although worse than the year-ago period, smoked the average analyst expectation for only $0.01. Second, 3D printer revenue jumped 41% year over year, which was a surprising result.
Third, healthcare applications comprised 34.7% of total revenue, up from 30.4% this time last year. Healthcare revenue tallied $113.8 million in the first six months of 2018, representing one-third of all revenue and powering the overall growth of the top line.
|
Metric |
First Half 2018 |
First Half 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$342.4 million |
$315.9 million |
8.3% |
|
Gross profit |
$164.0 million |
$160.8 million |
2% |
|
Operating income |
($25.2 million) |
($15.9 million) |
N/A |
|
Net income |
($29.6 million) |
($17.9 million) |
N/A |
|
Operating cash flow |
$9.2 million |
$18.6 million |
(51%) |
Data source: SEC filing.
As the table above demonstrates, revenue growth since the first half of 2017 has not been met with improved profitability. Even worse, 3D Systems reported a deteriorating bottom line and operating cash flow. One big reason: Selling, general, and administrative expense reached 41% of revenue. That's higher than industry peer Stratasys, which delivered 37% on the same metric in the first half of this year. Both are relatively high -- which helps to explain why neither business is profitable.
Simply put, 3D Systems needs to do a better job reining in expenses as it scales the business. Can new product launches lead to a brighter future?
Looking ahead
In August, 3D Systems launched two new printers that could prove critical to its future. The first, the NextDent 5100, is aimed at providing dental offices with fast and high-quality runs of trays, models, surgical guides, dentures, crowns, and bridges. The company claims the $10,000 printer, tied to its 2017 acquisition of a dental materials company called Vertex, is four times faster than the competition.
The idea is to allow dental offices to improve their workflows by forgoing the postal system without sacrificing quality, courtesy of coupling the portable NextDent 5100 printer with the company's software tools and making the system compatible with industry-standard oral scanning and dental software solutions. It's too early for investors to know how it'll fare, but it could grow into an important avenue for recurring material sales.
The second printer launched last month was the Figure 4 Standalone, which specializes in low-volume production applications where speed is valuable. That's not to suggest it sacrifices on accuracy, however, as the $21,900 machine boasts six sigma (an engineering standard for reproducibility and quality) repeatability. The target market is mainly R&D and design departments that want to save time in the design, build, test cycle and utilize rapid prototyping.
While the new product launches are encouraging, investors have seen these trickle out time and time again over the years with little impact on profitability. That suggests that it's best to wait and receive confirmation of real-world market traction before getting too excited.
DDD Total Return Price data by YCharts.
This is a risky 3D-printing stock
Thanks to a huge leap in stock price in August, shares of 3D Systems stack up surprisingly well against the total return (stock performance plus dividends) of the S&P 500 in the last three years. Unfortunately for investors that are all too familiar with volatility, there's not much reason to expect the gains to hold if the business cannot demonstrate sustainable and profitable growth. While the company is increasing its presence in high-margin healthcare markets, that simply hasn't translated into an expanding bottom line. Until that occurs, I think 3D Systems stock is one for investors to avoid.
