Investors Are Not Happy With 3D Systems’ Outlook

3D Systems (DDD -0.86%) may have released results for 2012, but investors are punishing the stock for 2011 and 2013. If that is as puzzling as it sounds, then keep reading. After digesting results released Monday morning, investors will find that the growth trend continued in 2012. While there is no denying that the company will grow for the foreseeable future, there are valid concerns surrounding the source and pace of growth. Are analysts and investors building up expectations to unreasonable levels? Let's examine a few areas that require some caution moving forward.

To the moon!
Here is how 3D Systems left 2012 in the dust:

Source: SEC filing  

It's quite obvious that the company crushed 2012 by moving forward in all key areas. New product revenue – a key driver of growth – leaped to $131.9 million from just $77.8 million in 2011. Acquisitions weren't the only means of growth either, as organic revenue growth jumped 22.4% compared to 19.2% last year. If we can believe it, that is (see below).

Another relief for investors is that 3D Systems is continuing to increase its gross profit margins across the board:

Source: SEC filing  

As I mentioned above, however, the results from 2012 are not the point of contention for investors. 

A haunting past? It's complicated
Shares stumbled out of the gates after earnings were released and fell even harder during the conference call. The reason? An analyst pointed out an error of unknown origin in the earnings presentation regarding the company's stated organic revenue growth. A simple graph comparing the category in 2012 to the year ago periods certainly doesn't add up to what the company reported last year.

The new presentation states that organic growth in the fourth quarter of 2011 was 8.8%, while the company's conference call transcript last year stated it was 19%. Ironically, the full-year number presented in the graph today was the same that was reported in the 2011 filing referenced above, also at 19%.

Looking back at the reported organic revenue growth for the remaining three quarters of 2011 raises more questions. From the first quarter onward, 3D Systems stated growth of 23%, 25%, and 12%, respectively. It would be reasonable to expect the fourth-quarter totals for a quickly growing company such as 3D Systems to be weighted more heavily than the preceding quarters. So how does the reported organic growth figure for the fourth quarter of 2011 drop from 19% to 8.8% while the full-year figure remains the same?   

Is it possible that the company's acquisition accounting principles are so complicated even it cannot accurately trace revenue sources? Its actually a simple process, so maybe the company really did just report the wrong numbers by accident. There is certainly some explaining to do. Unfortunately, since the company does not report actual organic revenue totals, just percentage changes, investors may never know what really happened. Let's just hope it does not continue to be an issue in the future.

Outlook gut check
Accounting discrepancy aside, the company's fourth-quarter earnings per share of $0.39 beat estimates of $0.38. And although quarterly revenues of $101.6 million missed the mark of $103.86 million it wasn't by a wide margin. All systems go, right?

Disappointment enters when investors glance at the company's outlook. Although 3D Systems is calling for 2013 revenue between $440 million and $485 million and split-adjusted non-GAAP EPS between $1.00 and $1.15, analysts had profit margins pegged much higher. Before the call, expectations were for revenue of $442.2 million supporting an EPS of $1.05. While 3D Systems did guide higher than estimates it appears that due to the high valuation of company, Mr. Market was craving even juicier guidance.  

Is it time to panic?

Huge growth never comes cheap
Investors will need to adjust their own expectations for the company accordingly, but we Fools never prescribe panicking as a remedy for coping with uncertainty. I asked if investors were getting a little carried away with the 3-D printing industry and throwing inhibitions to the wind last month. Without making any novel conclusions, I simply noted that it would be awfully difficult for the company to grow at the expected 45% per year through 2016.

The high current P/E and forward P/E will be keeping me away from considering the company, but not everyone agrees. Anders Bylund recently pointed out that huge growth never comes cheap. In fact, our Rule Breakers newsletter thrives upon that idea. Fool co-founder David Gardner even likes it when companies are labeled "overvalued." You may think he's crazy, but as an early investor in Amazon and AOL, David has witnessed some crazy returns by taking a long-term view.

Foolish bottom line
No one, including myself, is questioning that the company is growing, but people are beginning to question how quickly and from which sources. Of course, the company has no control over the attainability of analyst expectations. All it can do is continue to push into new markets, strategically consolidate the industry, and help lead the 3-D printing industry to maturity. What do you think about the company's earnings? Let me know in the comments section below.

*Editor's note: A previous version of this article misquoted Wall Street's EPS expectations for 2013 as $1.58; this was the value before the stock split, and EPS has been adjusted to $1.05 to reflect the stock split. Also, a previous version of this article referred to the company's SEC filing, whereas it should have referred to the company's conference call transcript. The Motley Fool regrets the errors.