In this edition of The Motley Fool's "Ask a Fool" series, Foolish reader Bonnie H. emailed us about 3D Systems (NYSE:DDD), which was trading around $53 a share when she wrote:
Just wondering if you think DDD [3D Systems] is a buy now, or [should I] wait till it gets under $50 per share?
If you're a long-term investor contemplating whether or not a 5.7% decline in a stock's price is worth waiting for, the short answer is probably not, because the longer your investment time horizon, the less price matters. That's not to say that price doesn't matter, but a 5.7% difference is hardly going to make or break a long-term investment of five years or longer.
Instead of focusing on prices that could carry a high degree of psychological weight, try approaching investing from the perspective that you'll become a long-term business owner, and assess whether the business behind the stock price is worth owning for the long haul. This approach should help steer you into thinking more long-term, rather than fixating on the inevitable day-to-day stock price fluctuations.
The pizzeria test
Imagine that your local pizzeria wanted to open up a second location and asked you to invest. What kind of questions would you ask to help determine if the business was viable, if it was in a great position to benefit from a second location, that you'd be handsomely rewarded for your investment, and that you wouldn't be overpaying or exposing yourself to too much risk? Likewise, you can think like a business owner about any publicly traded company to help determine if a stock should ultimately become part of your portfolio.
Tailoring the pizzeria example to 3D Systems means understanding factors like the 3D printing industry at large as well as the company's growth strategy, leadership, competitive positioning, financials, and major risk factors -- and of course, the stock price fits into the picture.
The Amazon.com of 3D printing
Investors can think of 3D Systems as the Amazon.com of 3D printing, in the sense that it's on a quest to define itself as The Everything 3D Printing Store. Having made about 50 acquisitions over the last three years, 3D Systems has been aggressively pursuing and growing its market opportunity in the hopes of solidifying what it believes it already has: a first-mover advantage as the most vertically integrated 3D printing company in the world. With seven distinct 3D printing technologies in its portfolio, 3D Systems has the opportunity to cater to more growth opportunities than its competitors, because different 3D printing technologies are often best suited for different applications. For instance, the technology to 3D-print an automotive dashboard prototype fundamentally differs from the technology needed to 3D-print a personalized metal knee replacement.
Also like Amazon.com, 3D Systems is more concerned with investing in the long-term success of its business than with short-term earnings. While this approach hasn't been applauded by all investors in recent quarters, management remains confident it'll drive stronger operating results in the years ahead. Taking into account how the 3D printing industry is expected to grow like gangbusters between now and 2020, it becomes more evident that 3D Systems is trying to make the most of its market opportunity with this hyperaggressive strategy.
Assessing staying power and risks
With over $570 million in cash on its balance sheet and $11.5 million in long-term debt as of the second quarter, 3D Systems has sufficient cash to continue building out its portfolio with additional acquisitions, continued research and development, and new strategic partnerships for the time being. Should 3D Systems run low on cash, however, the company might turn to secondary offerings to raise additional capital, as it has historically done, which could potentially put previous investors at risk of dilution.
Speaking of risk, one of the biggest risks currently facing 3D Systems is that key 3D printing patents around its stereolithography and selective laser sintering technologies have expired, inviting new competition, which is often willing to democratize access to technologies that are typically reserved for six-figure 3D printers. Although it's still too early to tell how this will affect 3D Systems' underlying business, the risk of increased competition could potentially put downward pricing pressure on some of 3D Systems' printers or technologies, and potentially impact the company's overall profitability, depending on the severity.
However, it's important to note that 3D Systems remains committed to investing in research and development that drives innovation, and certainly wouldn't be afraid of making an acquisition if it helped maintain its competitive positioning. In other words, 3D Systems hardly rests on its laurels, and investors shouldn't expect the company to sit idly in the face of intensified competitive forces.
While this is not a fully inclusive list, other notable risks facing 3D Systems include potentially outsize R&D obligations due to the burden of having seven different 3D printing technologies, seemingly poor employee morale based on Glassdoor ratings, and the challenge of successfully integrating all those acquisitions under one umbrella without creating operational issues or inefficiencies.
Putting it all together
In 2013, 3D Systems generated $513.4 million in revenue, which represented about 17% of the $3.07 billion in revenue the 3D printing industry generated worldwide, according to Wohlers Report 2014. To put this figure into context, 3D Systems' 2013 revenue share edged out competitor Stratasys by about 1%, earning it first place in terms of revenue share for the year.
3D Systems has set a goal of generating over $1 billion in full-year sales by the end of 2015, and worldwide 3D printing revenues are projected to generate $5.3 billion. This suggests that 3D Systems is aiming to grow its share of industry revenue by about another 3% to 19% in two years.
Because 3D Systems is currently more concerned with investing in the long-term success of its business than with short-term earnings, its trailing P/E ratio of about 133 tells investors very little about its growth strategy, prospects, or financial well-being, not to mention making its valuation seem very high based on conventional metrics. Admittedly, 3D Systems isn't a cheap stock on paper, even with shares having fallen more than 50% year to date.
Still, I think there are so many factors that matter in determining if a company's stock is trading at a "good" price based on traditional metrics. Only after you've done your homework on the underlying business should you ask yourself whether 3D Systems' stock is worth the premium. As a current 3D Systems shareholder, I will continue holding my shares for as long as the fundamentals of the underlying business remain on course, regardless of where the stock price goes in the short term.
Steve Heller owns shares of 3D Systems, Amazon.com, and Apple. The Motley Fool recommends and owns shares of 3D Systems, Amazon.com, Apple, and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.