3D Systems Proves It's No Gimmick

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 (DDD -0.86%). It was at that level that Hewlett-Packard (HPQ 1.55%) 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

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) still make money on their printers that they practically give away. Heck, when you run out of ink, it's almost more cost-effective to throw out the printer than by new ink jet cartridges.

While much of 3D Systems operations are focused on the consumer end of the business, it hasn't neglected the commercial side. Rival Stratasys (SSYS -0.20%) it generally seen as the enterprise-focused 3-D printer company, but 3D Systems recently introduced a large-format printer for commercial use that prints at twice the speed as the previous version; a new printer aimed at high-volume jewelry production; and an Air Force contract to transition specialty-engineered SLS materials and machinery into the production of F-35 and other weapon systems.

Maybe because I'd like to be printing out parts on my dining room table, I think the most exciting component is 3D Systems' consumer-facing printers. Its new $1,300 Cube printer comes with incredible functionality right out of the box, and using 3D's online technology, you really can be creating designs while eating dinner.

The fine print
Yet the company isn't cheap. It trades at 71 times earnings and 27 times estimates, and even its enterprise value goes for 45 times its free cash flow. I've rated the 3-D printer to outperform the broad market indexes on CAPS, the 180,000-member investor community where informed opinion is translated into stock ratings of one to five stars. While it's more than doubled in value since I rated it in January -- compared to an 8% rise in the S&P 500 -- I'm finding it difficult to recommend here at these levels.

By making a CAPScall on the stock, I hold myself accountable for the opinions I express here that you can then track in real time. But let me know in the comments section below whether you agree 3D Systems may soon print whatever profits it wants.

A sky-high opportunity
Three-dimensional printing has the potential to completely rewrite its industry, and The Motley Fool has indentified the "3 Stocks to Own for the New Industrial Revolution." 3D Systems and Stratasys are two of them, and you can download a copy of the free report now to find out who the third company is that will change the way companies operate as we know it.