Some companies are older than they look. Would you believe that 3-D printing mainstay 3D Systems (NYSE: DDD) is as old as Windows? The innovative company was founded in 1986, a few short months after the first (and largely forgettable) version of Windows was released. Today, both are known worldwide, though each for quite different reasons.
I've been bullish on 3D Systems for some time, but that doesn't mean I can't recognize the risks it faces. Yesterday, I offered you three reasons to buy the company's high-flying stock. Today, I'll take the contrarian view, offering you three reasons 3D Systems might be too dangerous for your portfolio. The final decision, as always, will be up to you.
1. Declining profit margins
Some companies sacrifice short-term profits for long-term market share. Amazon.com (Nasdaq: AMZN) is notable for this strategy, as its low single-digit net margin over the last decade attests. Founder Jeff Bezos has shown an extreme willingness to forgo juicing profits in the present in order to spend to invest in projects that should keep Amazon at the forefront of Web technology and retail for years to come. But there are occasions when this can be a dangerous strategy, such as when a company has been on a major acquisition binge despite holding less than $100 million in the bank.
The company's trailing-12-month free cash flow stands at $40 million, but it just completed a $137 million buyout of two complementary companies at the start of the year. Rival Stratasys (Nasdaq: SSYS) is no better, with just $24 million cash on hand, but Stratasys hasn't made any recent plans to offer $100 million worth of new shares, either. Net margins have been on a roller coaster for 3D Systems over the past 10 quarters, while Stratasys has been much steadier:
|
Quarter |
3D Systems Net Margin |
Stratasys Net Margin |
|---|---|---|
| Q4 2009 | 9.8% | 19.4% |
| Q1 2010 | 6.4% | (1.9%) |
| Q2 2010 | 7.8% | 7.8% |
| Q3 2010 | 12.9% | 10.5% |
| Q4 2010 | 18.3% | 12.6% |
| Q1 2011 | 14.2% | 14.5% |
| Q2 2011 | 24.3% | 10.6% |
| Q3 2011 | 12.6% | 14.8% |
| Q4 2011 | 11.5% | 13.1% |
| Q1 2012 | 8.0% | 10.1% |
Source: Morningstar.
This alone isn't enough to cause worry, but the second reason could be the straw that broke the 3D printed camel's back.
2. Serious global economic headwinds
As much as 3D Systems might like to be a consumer-focused company, 3-D printing is still largely the realm of the corporation. The company has a large list of corporate clients, including Ford and many other carmakers, Boeing, Airbus, Northrop Grumman, and both major U.S. government aerospace branches, and a number of other consumer-focused multinationals.
This seemingly diverse mix of clients share one common denominator: all are at risk of substantial losses in the months to come. From Europe to China, many countries are seeing weak growth grind to a halt, and the U.S. government, particularly the military, has major budget cuts to contend with in 2013. This is hardly a problem unique to 3D Systems. However, when you consider that the company only became (barely) profitable at the end of the last recession, and has put major resources into pursuing a consumer strategy when consumers around the world may be tightening their belts with renewed vigor, it appears that now may not be the best time to jump aboard the 3D Systems train.
3. Consumer commoditization
My colleague Anders Bylund mentioned open source as a driver of future innovation last week, singling out 3D Systems and Stratasys for their ability to create products you might otherwise buy in stores. But 3-D printing has its own open-source movement that could seriously undermine 3D Systems' effort to expand into new markets.
MakerBot was selling inexpensive consumer 3-D printers when the Cube was just a gleam in 3D Systems' eye, and the start-up is committed to the open-source model. Thousands of MakerBots have been bought since 2009, and the company's Thingiverse already is what 3D Systems hopes its Cubify community will become -- a repository of designs made by loyal users. Shapeways is another 3-D printing design community with quite the selection of designs. One open-source 3-D printing concept, the RepRap, is a self-replicating printer that can effectively print new versions of itself, or at least most of itself. If that's not a threat to the big players, I'm not sure what is.
None of these options has the same breadth of functionality as 3D Systems' high-end machines, but they all pose real threats to the company's consumer efforts. If 3-D printing communities band together to design high-end printers as well, that might be 3D Systems' (and Stratasys') death knell.
Do these three reasons sway you from your appreciation of this company, or are they overblown concerns? I continue to believe that 3-D printing will be a major driver of future innovation, but that doesn't mean 3D Systems will be the company behind it. Let me know if I'm right or wrong with a comment, and maybe we can open-source our final decision.
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