3D Systems Is Still Great!

After two articles appeared at Seeking Alpha essentially questioning the veracity of 3D Systems (DDD 5.35%) accounting practices, the 3-D printing leader saw its stock take a bit of a drubbing.

With the overall market down almost 2% in the same time period, 3D Systems really hasn't taken as much of a beating as you'd think would be the case when it comes to accusing a company of fraud. Unfortunately, it seems a desire by short-sellers to push the stock lower coupled with a misunderstanding of basic accounting principles has led to a 10% decline in the stock.

3D Systems snapshot

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; 3D Systems doesn't pay a dividend.

I'm not one of those who thinks that simply because a short-seller has a different motive than me that his analysis should be dismissed out of hand. It's often the short-seller who isn't blinded by allegiance to saying, "Buy! Buy! Buy!" who uncovers hidden gems of truth. But let's not also forget that sometimes there is motive behind him saying, "Sell! Sell! Sell!"

Math is hard
The biggest charge leveled against 3D Systems was that it was bogusly recording revenue as organic when in fact it was coming from acquisitions. Yet the printer maker fully disclosed the different growth rates it enjoyed in both areas in its SEC filings and accounted for the acquisitions made just as every other company that's made an acquisition does: you separate out the revenues until you lap them at the anniversary date of the purchase and then you fold them all into the total revenues. To suggest -- as one of the bears did -- that 3D Systems should continue segmenting acquisitions made long ago displays a knowledge gap in GAAP accounting.

Now I might take issue with a company that grows by acquisition, as oftentimes it's a strategy that works until it doesn't. Cisco Systems (CSCO +0.47%) was one that gobbled up everything in sight for a time and grew large beyond measure, until it fell hard.

Yet there are some companies that have made a science out of it. Nuance Communications (NUAN +0.00%) is one that had done quite well for itself for the most part, rolling up the voice recognition market under its umbrella, even if I do remain leery of the practice as it can lead to indigestion. But that's a whole different ball game than saying its accounting is fraudulent, which 3D Systems' is apparently not.

In the sight of greatness
As I pointed out a couple of weeks ago, the 3D Systems recorded sales surging 57% in the third quarter to $90.5 million and profits doubling. And as was mentioned then, organic growth -- the kind not made from acquisitions -- was up 26%! It also sold fistfuls of new 3-D printing units, showing this technology will be a transformational one for the industry.

While Stratasys (SSYS +0.75%) and Dassault Systemes (DASTY 1.78%) are also players in the niche, it's my belief 3D will lead them because it's closest to breaking the $1,000 price point. I've highlighted before that that was the point at which Hewlett-Packard (HPQ +0.38%) saw ink jet printers create a groundswell of demand. So with 3D's new $1,300 Cube printer offering functionality coupled with its online technology that gets you printing right out of the box, it will soon pull away from the competition.

The long and short of it
As I said, I don't dismiss short-sellers out of hand. David Einhorn broke through the circled wagons of bullish opinion on Green Mountain Coffee Roasters (GMCR +0.00%). Before him Jim Chanos was notably -- and correctly -- short Enron. Heck, even Citron Research helped bust the myth of Chinese reverse merger stocks by revealing their shady financials.

Yet you can't just take their position at face value, and looking at the bearish opinion on 3D Systems shows big problems with their short thesis, and perhaps underscores the reasons why bulls are bullish about the 3-D printing leader. There are risks since you don't know how well, really, consumers will take to 3-D printing, particularly in these economic times, but one risk certainly doesn't seem to be fraudulent accounting.

Profits in bas relief
Since I rated 3D Systems on Motley Fool CAPS at the start of the year, the stock has more than doubled, compared to a 4% gain in the S&P 500. Though its shares have pulled back 10%, it's still an expensive stock. While they trade for less than 11 times earnings estimates, its enterprise value goes for 46 times its free cash flow, so while we can thank the bears for giving us a better entry point on 3D Systems, I'm not certain they've given us a great one.

But tell me in the comments box below whether you think the 3-D printing specialist will soon make short work of the short-sellers.