Now that the two leading 3D printing companies, 3D Systems (DDD +2.71%) and Stratasys (SSYS +3.90%), have reported third-quarter earnings, let's directly compare their results. Keep in mind that qualitative factors can be just as important as quantitative factors, and future results are more important than current numbers. Even with these caveats, our findings from a face-off between these companies on key metrics should prove helpful in making investing decisions in this industry.
I'll use the same format as I did for the first and second quarters. First, we'll look at key quarterly stats; then, full-year 2014 guidance; and last, valuations.
Total revenue growth
| 3D Systems | 23% increase to $166.9 million, essentially falling in line with analysts' reduced estimate of $167.7 million. 3DS pre-announced its earnings on Oct. 22, so analysts revised their estimate downward. The original consensus was $186 million, so revenue fell considerably short. |
| Stratasys | 62% increase to $203.6 million, easily beating consensus estimate of $195.5 million. |
Source: Q3 earnings reports.
Advantage: Stratasys
Stratasys' huge revenue increase was helped by its third-quarter acquisitions of 3D-printing service businesses Solid Concepts and Harvest Technologies. Additionally, its MakerBot unit continues to perform well, with revenue increasing "over 80%" on a pro forma basis, according to the earnings release.
3D Systems' earnings release noted that the company's tepid overall and organic revenue growth was due to "continued manufacturing constraints for direct metal printers and the delayed availability of its newest consumer products." These two issues are a carryover from the second quarter, though CEO Avi Reichental stated in the earnings release: "Now that these availability gaps have been resolved, we expect our revenue growth rate to increase." We'll see if this proves to be the case when fourth-quarter results are released.
3D Systems' health care segment remains a bright spot for the company, as revenue rose 121% to $37.4 million.
Organic revenue growth
|
3D Systems |
12% |
|
Stratasys |
35% |
Source: Q3 results.
Advantage: Stratasys
Organic revenue growth (revenue growth in businesses that have been owned for at least one year) is a key metric to focus on for companies that are growing by acquisitions. That's because sometimes companies that rely on frequent acquisitions to power their performances don't always nurture their existing businesses as much as they should.
3D Systems has largely grown through buying many smaller companies. Prior to this year, Stratasys had not been very acquisitive. It was involved in one huge merger (Objet, 2012) and made one large acquisition (MakerBot, 2013).
Stratasys turned in strong organic growth, which we'd expect for a leading company in a space that is growing like gangbusters. The global 3D printing industry grew 35% year over year in 2013, and is expected to post greater than 31% compound average annual growth through 2020, according to industry watcher Wohlers Associates. 3D Systems' weak organic growth was explained in the previous section. This is the second quarter in which 3D Systems has experienced a significant drop in organic growth rate on a year-over-year basis. Last quarter, organic growth dropped to 10% from 30%.
Non-GAAP or adjusted earnings per share
| 3D Systems | $0.18, down 31% from the year-ago period, and inching past the revised estimate of $0.17. Prior to the company releasing preliminary results, analysts had expected $0.26. |
| Stratasys | $0.58, up 29% and sliding by the consensus estimate of $0.57. |
Source: Q3 earnings reports.
Advantage: Stratasys
In the context in which earnings per share are usually judged -- changes from the year-ago period and relative to analysts' estimates -- Stratasys has the clear advantage. It's important, however, to remember that Stratasys' percentage increase over the year-ago period was boosted by the 2012 Objet merger that is now being essentially digested.
GAAP EPS
| 3D Systems | $0.03, down from $0.17 |
| Stratasys | ($0.62), down from ($0.16) |
Source: Q3 earnings reports.
Advantage: 3D Systems
Both companies' earnings based on generally accepted accounting principles, or GAAP, are moving in the wrong direction. Investors shouldn't expect an increase in GAAP numbers anytime soon, as both companies have ramped up their growth strategies. That said, 3D Systems has positive GAAP earnings, so it can be considered to have the advantage here.
Non-GAAP gross margin
| 3D Systems | N/A |
| Stratasys | 58.4%, flat compared to last period's 58.8% |
Source: Q3 earnings reports.
Advantage: N/A
This metric is more important than the GAAP gross margin, given that both companies are in major acquisition modes. Unfortunately, though, 3D Systems doesn't provide a reconciliation of its GAAP to non-GAAP results on the revenue end, just the earnings end.
GAAP gross margin
| 3D Systems | 47.8%, down from 52.6% |
| Stratasys | 43.1%, down from 48.2% |
Source: Q3 earnings reports.
Advantage: 3D Systems.
Research and development spending, GAAP basis
| 3D Systems | 10.7% of revenue, up from 8% in the year-ago period. |
| Stratasys | 11.5% of revenue, up from 10.8% and essentially in line with averages during the past few years. |
Source: Q3 earnings reports.
Advantage: Stratasys.
Stratasys' R&D level has been consistent at about 10%-11% of revenue for some time, while 3D Systems recently significantly boosted its spending level. This isn't surprising, given that Stratasys has largely been growing organically while 3D Systems has relied on acquisitions to fuel much of its growth. 3D Systems needed to boost its R&D spending if it wants to remain an industry leader.
Given Hewlett-Packard's recent unveiling of impressive 3D printing tech that it plans to bring to market in 2016, it seems likely that both companies might be forced to increase their R&D efforts.
2014 guidance
| 3D Systems |
Revenue of $650 million-$690 million, adjusted EPS of $0.70-$0.80, and GAAP EPS of $0.18-$0.28. Previous: Revenue of $700 million-$740 million, adjusted EPS of $0.73-$0.85, and GAAP EPS of $0.44-$0.56. |
| Stratasys |
Revenue of $750 million-$770 million, adjusted EPS of $2.21-$2.31, and GAAP EPS of ($0.63)-($0.49). Previous: Revenue of $750 million-$770 million, adjusted EPS of $2.25-$2.35, and GAAP EPS of $0.20-$0.38. |
Source: Q3 earnings reports.
This category doesn't lend itself to crowning a "winner."
First, it's important to note that both 3D Systems and Stratasys ratcheted down their full-year 2014 estimates. 3D Systems lowered all three metrics when it preannounced its earnings, while Stratasys lowered both earnings metrics and maintained its previous revenue guidance.
3D Systems' guidance at the midpoint suggests an adjusted earnings decrease of 11.8% and a GAAP earnings decrease of 49% on revenue growth of 23.4%. Stratasys' guidance at the midpoint suggests adjusted EPS growth of 25% and a GAAP EPS decrease of 21.4% on revenue growth of 57%. Stratasys has the obvious revenue growth advantage. It also appears to have the adjusted earnings growth advantage. However, it's important to remember that Stratasys is again benefiting from the Objet merger.
Valuation
| Company | Price/Sales | Trailing P/E | Forward P/E | 5-Yr. PEG |
|---|---|---|---|---|
| 3D Systems | 6.1 | 178 | 34.0 | 2.2 |
| Stratasys | 7.8 | N/A | 35.1 | 1.9 |
Source: Yahoo! Finance; data up to Nov. 17.
We can't accurately state which company has the advantage here. That's because some companies within the same industry deserve to sport a premium valuation relative to their competitors. That said, 3D Systems has a lower P/S and a slightly lower forward P/E than Stratasys. As Stratasys has been executing considerably better than 3D Systems in 2014, its higher valuations seem warranted, as neither is excessive. Interestingly, Stratasys is still "cheaper" on a five-year PEG (P/E-to-growth) basis.
Cash flow valuations are also important, with operating cash flow being a better metric than free cash flow for companies investing in growth. However, this comparison wouldn't be very telling at this point due to the negative effect of the Objet merger on Stratasys' cash flow during the trailing 12 months.
And we have a winner...
As you can see, Stratasys has the overall advantage, which marks the third quarter it has performed better than 3D Systems based upon the method used here. Again, investors should keep in mind the caveats mentioned in the opening. Furthermore, for long-term investors, one quarter is a very short period by which to judge a company, and even three quarters is a relatively short time.
