Is 3D Systems Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what 3D Systems' (DDD 2.31%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell 3D Systems' story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much 3D Systems' free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If 3D Systems' share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is 3D Systems managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at 3D Systems' key statistics:

DDD Total Return Price data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009.

DDD Return on Equity data by YCharts.

Source: YCharts.
*Period begins at end of Q3 2009.

How we got here and where we're going
3D Systems earns a solid five of seven possible passing grades, missing out on a better score because of a very slight loss at the beginning of our tracking period and also because of increased debt. But where 3D Systems passes, it sure blows the curve apart with some truly monstrous growth numbers. Will 3D Systems continue this impressive progress? Let's dig deeper to find out.

3D Systems' latest quarterly report put an exclamation point on a generally solid year, with improvements in virtually all the important metrics we look for in growth stocks. The company needs to keep putting up impressive results to justify the intense (and growing) investor interest swirling in the sector, which has also pushed rival Stratasys (SSYS 0.96%) to similar heights. Both companies have pushed the 3-D printing industry toward greater and greater consolidation in the past two years, snapping up peers large and small on the way to a near-duopoly. That's helped each company continue to impress investors, but it also raises the question of whether they can enjoy similar levels of organic growth now that there are few remaining 3-D printing players to acquire.

3D Systems is also leading the charge (at least for the publicly traded 3-D printing companies) toward in-home adoption, which is a trend I've previously argued against as a major growth driver. However, there is still tremendous potential for 3-D printing to augment or supplant the current online sales infrastructure with a network of "on-demand manufacturing centers" staffed primarily by robots. If you're going to contemplate the future of a transformative technology, you may as well go all the way. Additionally, 3-D printing could be (and already is, on a very limited basis) used to construct biological tissue, which would revolutionize the pharmaceutical industry as well as the process of organ transplants. Bioprinting specialist Organovo (ONVO -4.35%) might wind up as 3D Systems' next acquisition target if the technology starts to catch on.

In the nearer term, 3D Systems' push toward home use might help grow a small but highly motivated community of designers into a legitimate 3-D design marketplace, by allowing talented people with limited means (many professional 3-D printers can cost six figures) to tweak, test, and turn out real creations in their own home, speeding up the design process for various projects that could then be sold online, possibly as the product of those on-demand manufacturing centers I mentioned earlier. This would be an appealing extension of Amazon.com's (AMZN -2.56%) existing "sell everything we can" business model, and it might also help 3-D design software leader Autodesk (ADSK 2.79%) stake out a greater role in the lives of less-technical creative types.

There are a lot of companies that could benefit from 3-D printing, and interest continues to intensify among both the consumer and industrial sectors. Keep in mind, however, that 3D Systems has been pushed to its present heights as much by investor interest as by its impressive fundamental growth. One misstep could destroy months or years of stock-price gains. This is not a stock for the faint of heart.

Putting the pieces together
Today, 3D Systems has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.