Shares of 3D Systems (DDD 1.97%) plummeted 14% on Friday, following the 3D printing company's release of fourth-quarter and full-year 2018 results after the market closed on Thursday. After this haircut, the stock is up 19.4% in 2019, versus the S&P 500's 12.3% return.
3D Systems stock's price action on Friday probably took many investors off guard because the market's initial reaction to 3D Systems' earnings release was quite positive, with shares gaining nearly 6% in after-hours trading on Thursday.
Here's what you should know.
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Fourth-quarter results and 2019 high-level guidance
In the fourth quarter, 3D Systems' revenue edged up 1.9% to $180.7 million, its GAAP loss per share narrowed by 100% to $0.04, and its adjusted earnings per share (EPS) doubled to $0.10. EPS beat the $0.07 Wall Street was looking for -- but that was only thanks to a tax benefit -- while revenue came in right about at the consensus estimate.
The company didn't issue specific guidance for 2019, but on the earnings call, CFO John McMullen provided a "high-level 2019 outlook":
We continue to expect growth to be driven by printer revenue growth, including the expected ramp of sales of new products launched throughout 2018, materials growth with higher growth beginning in the second half of 2019, continuing healthcare revenue growth, and software growth continuing and improving over time. ... We ... expect continued revenue growth, improved profitability, and cash generation.
With market participants seemingly satisfied on Thursday with 3D Systems' Q4 results and outlook, why did investors pummel the stock on Friday?
Check out the latest earnings call transcript for 3D Systems.
Wall Street firm lowered its 2019 revenue and EPS estimates
We can attribute the market's seemingly Dr-Jekyll- and-Mr.-Hyde-like behavior to Bank of America Merrill Lynch lowering its 2019 estimates for 3D Systems on Friday. Citing concerns about 3D Systems' declining gross margin, the firm's analyst who covers the stock rolled back his 2019 revenue expectations for the company to $710 million, from $712 million, and lowered his adjusted EPS projection to $0.19, from $0.25, according to Benzinga. The revenue action is negligible, but an earnings estimate rollback of 24% is significant.
The firm maintained its underperform rating on 3D Systems stock and left its $10 price target unchanged. For some context, shares closed out Thursday's regular trading session at $14.12 and, after taking the 14% hit on Friday, are now priced at $12.14.
3D Systems' gross margin
Long-term investors shouldn't pay too much attention to Wall Street's ratings and short-term estimates. That said, 3D Systems' declining gross margin is a legitimate concern. Gross margin can be expected to fluctuate from quarter to quarter based on such factors as product mix and timing of new product launches, which is why it's better to consider gross margins for trailing-12-month periods. A sustained decline in gross margin, however, can reflect a loss of pricing power from increasing competitive pressures.
Data by YCharts.
3D Systems' trailing-12-month gross margin has declined by nearly 200 basis points (2 percentage points) over the past two years, while rival Stratasys' gross margin has risen by roughly the same amount in a year and three quarters. (Stratasys hasn't yet reported its Q4 earnings.)
In the fourth quarter, 3D Systems' gross margin came in at 45.7%, down from 48.2% in the year-ago period. In the earnings release, the company attributed the decline to "the impact of sales mix, costs to launch and ramp new products, and lower on-demand manufacturing gross profit margins." For full year 2018, gross margin was 47.2%, flat compared with 2017.
One notable factor that's been dragging down the company's gross margin is the anemic growth in print materials, which sport higher profit margins than other parts of the business. In Q4, materials revenue dipped 2% year over year, and for the full year, it edged up only 1%, while overall revenue rose 6%. On the earnings call, management expressed confidence that materials growth will pick up in the second half of this year due to the solid recent growth in 3D printer sales. In 2018, printer revenue jumped 25% year over year on a 76% increase in unit sales.
Investors should keep their eyes on 3D Systems' gross margin and its revenue growth from materials sales, particularly for the second half of the year.
