In mid-2013, I decided the best way to profit from the massive opportunity in 3D printing was to buy a basket of industry stocks, including 3D Systems (NYSE:DDD), Stratasys, ExOne, Proto Labs, and bioprinter Organovo.
Two years have passed, and it's time for me to reevaluate the basket. While it hasn't performed well, I won't sell all of these companies. Instead, I'm parting ways with two holdings. Today, I'll give you my three reasons for selling shares of 3D Systems.
A questionable strategy from the start
In any burgeoning industry with a massive opportunity, mergers and acquisitions will always play a role. 3D Systems, however, took that approach to a whole different level. Between the Great Recession and 2014, the company made over 50 acquisitions.
I simply am not a huge fan of a company that relies so heavily on growth via acquisition. In the short term, it's probably an easy strategy to follow. But while "synergies" might look good on paper, investors can't ignore the cultural clashes that inevitably develop when one company acquires another.
That engenders disillusionment among employees, which eventually filters down to the company's ability to innovate and provide excellent services for customers. That might help explain why employees give the company very low ratings on Glassdoor.com, where only 28% of employees said they approve of the job done by CEO Avi Reichental.
Growth has come to a screeching halt
I knew 3D Systems was taking a questionable approach to the business when I bought shares -- which is why it was one of my smallest holdings -- but I was willing to give the company a pass based on its growth rates.
During its heyday, 3D Systems' revenue growth went through the roof. What many beginning investors missed, however, was that organic growth -- or the growth that occurred without factoring in acquisitions -- was never nearly as impressive.
While the entire industry has faced slowing revenue growth, I believe the company's inability to grow revenue organically last quarter could be a harbinger of things to come. Compare that to Stratasys -- the next-largest player in the industry -- which grew revenue by 6% during the first quarter, after accounting for currency fluctuations.
After years of growth via acquisition, 3D Systems has become quite fragile, with disparate acquisitions diluting the potency of the company to the point of a breakdown.
A fragile company
Finally, I'm starting to wonder how fragile 3D Systems really is. After finishing Nassim Taleb's book Antifragile, I realized there were several ways to evaluate the fragility of a company. This includes the amount of shares owned by insiders (skin in the game), the levels of cash and debt the company carries, future "optionality" for growth, and the culture within a company.
I've already discussed 3D Systems' negative Glassdoor ratings, but when I dug into the other variables, I didn't like those numbers, either. As best I can tell, Reichental owns 1.6 million shares of 3D Systems, worth about $32 million. That's no small sum, but it also accounts for just 1.4% of the company. When all executive officers' holdings are combined, they own just 2.5% of the company.
Currently, 3D Systems has $200 million in cash and just $9 million in debt. That's actually pretty solid. What concerns me, however, is that the balance sheet carries $608 million in goodwill -- equivalent to about one-quarter of the company's market cap. When acquisitions are the primary driver of growth, and that growth has faltered, I wouldn't be surprised to see the company write down that goodwill.
Finally, I have to wonder how much optionality 3D Systems has for the future. The company has already set itself up as the "one-stop shop" for all things 3D printing. That approach seems to be stalling, and I have to wonder what avenues 3D Systems would have for expansion without burning through copious amounts of cash.
At the end of the day, these concerns were simply too great for me, and I decided I'd be better off holding cash and waiting for higher-quality companies to yield attractive prices.