3D Systems (NYSE:DDD) has had a pretty amazing fall from its peak as a stock market darling in 2013. The company's revenue growth has stalled, gross margin has shrunk, and the nearly unlimited market investors thought 3D printing would open up didn't materialize.
Since then, management has shifted 3D Systems' focus to more specialized markets. The move is probably the right strategy compared to the failing traditional printer sale market, but that doesn't necessarily make this stock a no-brainer buy today.
3D Systems' long fall from grace
The chart below gives a pretty good picture of where 3D Systems has been over the past decade. The company was a high-growth stock to start the decade as 3D printing in general exploded, but then it stagnated as costs came down and the 3D printer market reached saturation.
Along the way, the company's technology has improved and applications for 3D printing have at least matured to a handful of areas where developers see value. But that maturation never led to a sustainably profitable business long-term.
And now, 3D Systems sees its best opportunities in the end markets where it can add a lot of value, hoping that higher gross margin in those segments of the market will lead to profitability.
Focus on the highest-value markets
If you look at 3D Systems' pitch to industrial stock investors today, it's based on the idea that medical and industrial companies see a lot of value in the company's products. In medicine, dental, medical devices, and planning for surgery, using 3D models makes a lot of sense. And those are markets where there's funding for 3D models and 3D Systems' services.
For industrial customers, 3D printing of plastics and metals allows them to produce low-volume products on demand and can reduce costs long-term. You can see where that can lead to low volume, but very high-value sales for 3D Systems.
Both of these markets make sense on paper, but they're niche markets and they're not likely to be high-volume businesses that investors once hoped for from 3D Systems.
Signs of progress?
If medical and industrial applications are the future of 3D Systems, we should be seeing some changes in the company's financial performance. Revenue may go down, but gross margin should go up if 3D printing is adding a lot of value to these end-users. In the third quarter, for example, healthcare revenue was up a modest 6.1% to $59.8 million but industrial sales plunged 23.8% to $75.3 million. The company doesn't break out margins in each segment, but gross margins were only up from 43.3% a year ago to 43.4%. So, if we're not seeing the medical and industrial focus lead to higher margins -- at least not yet.
We're still seeing 3D Systems' revenue in decline and gross margin struggle to return to near 50% -- a level the company managed only a few years ago. And on the bottom line, there's no sign that losses are going to subside soon.
Management has indicated that it expects the business to turn around when the pandemic lifts and the strategy of focusing on medical and industrial customers takes hold in the market. But until that happens, this is a stock I'll watch from afar. 3D Systems has failed to live up to lofty expectations for far too long, and that's why it's not a buy in my eyes.