3D Systems vs. Stratasys: Q4 Earnings Results and Valuation Face-Off

Now that the two leading 3D printing companies, 3D Systems (DDD 1.07%) and Stratasys (SSYS +0.63%), have reported fourth-quarter earnings, it's time for our quarterly face-off.

Keep in mind that qualitative factors can be just as meaningful as quantitative elements, and future results are more important than current numbers. Even with these caveats, these findings should prove helpful in making investing decisions in this space. I'll use the same format as I did for the first, second, and third quarters. First, we'll look at key quarterly stats; then, full-year 2015 guidance; and lastly, current valuations.

Let the games begin!

Total revenue growth

Advantage: Stratasys.

Stratasys trumped 3D Systems here, though both companies missed analysts' expectations by roughly the same percentage.

Stratasys' revenue boost was helped by its third-quarter acquisitions of 3D-printing service businesses Solid Concepts and Harvest Technologies. On the other hand, its MakerBot unit was responsible for the company falling short of estimates and its own guidance. The desktop 3D printer maker's year-over-year revenue growth slowed considerably in the quarter to 7%, mainly because of quality issues -- faulty extruders -- with its fifth-generation Replicator released last year. Stratasys expects MakerBot to continue to negatively affect its results in the first half of 2015.

3D Systems' services segment drove its growth, as it posted year-over-year revenue growth of 33% versus the product segment's 16%. The services segment was helped by the company's fourth-quarter acquisition of its Latin American service bureau, Robtec. 

Positively, 3D Systems appears to have successfully addressed the two main issues that it blamed for its tepid results in the previous two quarters: manufacturing constraints for direct metal printers and the delayed availability of its newest Cube desktop 3D printer. Additionally, 3D Systems' health care segment remains a bright spot.

However, perhaps not surprising for a company that has many irons in the fire, a new trouble spot popped up: The North American region's results were weak, which the company attributed to sluggish 9% year-over-year unit volume growth of its jetting 3D printers. (We don't have a revenue growth number.) A couple of possible reasons for this come to mind, but since one quarter doesn't make a trend, it seems premature to speculate. 

Organic revenue growth

Advantage: Stratasys.

Stratasys blew 3D Systems out of the water here. Organic revenue growth (revenue growth in businesses owned for at least one year) is a key metric to focus on for companies that rely on acquisitions to fuel much of their growth. That's because these companies don't always nurture their existing businesses as much as they should.

3D Systems has long been the serial acquirer in this space, gobbling up more than 50 mostly smaller companies over the past three or four years. Prior to last year, when both companies upped their growth strategies, Stratasys' acquisition style had been markedly different: It was involved in just one huge merger (Objet, 2012) and made one large acquisition (MakerBot, 2013). 

While Stratasys' organic growth did slow somewhat both year over year and sequentially, 26% is still a robust number. If we exclude MakerBot -- which accounted for 12% of total revenue in the fourth quarter -- Stratasys printed organic growth of 29%. So, there's clearly solid demand for its enterprise-focused offerings.

The global 3D printing industry grew 35% year over year in 2013, and is expected to post greater than 31% average annual growth through 2020, according to industry expert Wohlers Associates. In the context of such growth dynamics, 3D Systems' organic growth rate is worrisome. This is the third quarter in a row in which 3D Systems has experienced a huge year-over-year drop; its organic growth rates for the second and third quarters were 10% and 12%, respectively. Things need to start to turn around pronto if the company is to remain an industry co-leader.

Non-GAAP or adjusted earnings per share

Advantage: 3D Systems.

Earnings per share are usually judged via two contexts -- relative to the year-ago period and relative to analysts' estimates. 3D Systems wins on both counts.

The culprit behind Stratasys' earnings miss: a $102 million goodwill impairment charge for MakerBot. Basically, this means the company overpaid for MakerBot. 

GAAP EPS 

Advantage: 3D Systems.

Both companies' earnings based on generally accepted accounting principles, or GAAP, have nosedived as they have ratcheted up their growth strategies. That said, 3D Systems has (barely) positive GAAP earnings, so it takes the gold here.  

Non-GAAP gross profit margin

Advantage: N/A

This metric is somewhat more important than the GAAP gross margin, given the growth strategies both companies are pursuing. 3D Systems, however, doesn't provide a reconciliation of its GAAP to non-GAAP results on the revenue end, just the earnings end. 

GAAP gross profit margin

Advantage: Stratasys. 

Stratasys inched by 3D Systems, recapturing the crown it held in the first and second quarters after losing it in the third. Both companies' numbers are moving in the wrong direction due to their stepped-up growth strategies.

Research and development spending, GAAP basis 

Advantage: 3D Systems.

Stratasys' research and development spending has remained consistent at about 10%-11% of revenue for some time, while 3D Systems in 2014 spent in a range of about 11%-12%, up significantly from 7%-8% in most of 2013. This isn't surprising, given that 3D Systems has relied on many small acquisitions to fuel much of its growth. It needed to hike its R&D efforts if it wants to remain an industry leader.

2015 guidance 

This category doesn't lend itself well to naming a winner.

3D Systems' guidance at the midpoint suggests an adjusted earnings increase of 43% and a GAAP earnings rise of 264% on revenue growth of 35%. Stratasys' guidance at the midpoint implies adjusted EPS growth of 7.8% and a GAAP EPS increase of 86% on revenue growth of 26.7%. 3D Systems' percentage increases are higher across the board. However, it's important to remember that these are only projections and this comparison will somewhat unfairly favor a company with the worse current results.

Valuation 

This category also doesn't lend itself to choosing a winner. We have a mixed bag here, as Stratasys has a lower P/S, while 3D Systems has a lower forward P/E and PEG. Granted, Stratasys had troubles with MakerBot in the fourth quarter, but as a whole it still executed better than 3D Systems did in 2014. In this context, its slight premium valuation seems warranted. 

Cash flow valuations are very important, with operating cash flow a better metric than free cash flow for companies investing in growth. However, this comparison wouldn't yet be very telling as the Objet megamerger is still exerting a negative effect on Stratasys' trailing-12-month cash flow. 

And in a first... we have a draw! 
We essentially have a draw, after Stratasys took the crown in the first three quarters of 2014. However, I'm going to make a subjective call -- and you're welcome to make your own -- and let Stratasys keep the gold medal. That's because two metrics in which it smashed 3D Systems -- organic revenue growth and gross margin -- are key for future performance. These numbers seem to deserve additional weight, especially for long-term investors.