3D Systems Corporation (NYSE:DDD), considered a bellwether for the 3-D printing market, released preliminary results for 2013 and provided profitability guidance that was below Wall Street estimates.
As previously noted in ValueWalk, the 3-D printing market has been long on hype and industry promise but short on delivery of cost effective solutions in an actual mass production environment. Certain hedge fund professionals have been shorting the stock, led by Dialectic and Whitney Tilson, a fact reported by ValueWalk in December and January.
Long way to go for earnings to catch stock price
The recent release of results and forward guidance play into the short investment thesis outlined when the stock was trading near $100 per share: spending to capture market share just didn’t make sense relative to the profit potential. Further, the much hyped “promise” of integrating 3-D printing into actual production was impractical from a cost standpoint in all but the most exotic (and expensive) markets. As a result, earnings have a long way to go to catch up to the stock price – some say an unrealistic distance. Either earnings catch up to the stock price, or vice versa. In the case of 3D Systems Corporation (NYSE:DDD) the stock price has been swooning lower to catch up to earnings growth, a move anticipated by certain fund managers highlighted in ValueWalk.
3D Systems Corporation (NYSE:DDD) financial results for 2013, earnings of $513-514M, or $0.83-0.87 per share, were not really the issue to the extent that forward guidance disappointed. The cause for concern many fund managers had with the 3-D printing market is the high cost of new product development relative to the somewhat dubious short term payout, which is also reflected in a Citi research note released yesterday. In analyzing forward earnings of $680M to $720M the research report said “significantly higher spending will cut into profitability with EPS range of $0.73-0.85 falling well short of our $1.24 and street estimate of $1.27. Base on EPS guide, it appears operating margins will fall from mid-20s in 2013 to high teens (all else equal). We’d expect revenue to be more heavily weighted in the back half with new product launches not likely to have an effect until the company can ramp sales capacity.”
3D Systems R&D expenses cause for concern
The 3-D printing market is one in which it investors have come to expect high research and development costs. However, 3D Systems Corporation (NYSE:DDD) spending may be out of line with the industry. “FY14 outlook carries a much bigger OPEX burden than 35% revenue growth would justify,” Citi computer hardware analyst Kenneth Wong wrote in the research note. “Shares are now trading at ~35x implied EBITDA (~$160M based on EPS guide), consistent with growth rate which is the level where investors have generally felt comfortable.”
Wong believes that investors interested in the 3-D industry growth story might be well suited to consider other alternatives in the sector. “We believe investors should look to SSYS which has been dragged down >10% on the DDD results,” Wong said in the report. “SSYS has already offered FY14 outlook and preannounced higher spending minimizing any potential downward surprises through earnings season.”
“It’s media promotion and hype”
Citi’s comments come on the heels of Andrew Left from Citron Research saying on CNBC that 3D Systems Corporation (NYSE:DDD) is “flawed beyond all measures.” Left isn’t shy with his comments about 3D Systems Corporation (NYSE:DDD), which he calls a “roll-up of third tier printing companies.” At some point he says investors “should wake up and see what this company really is: media promotion and hype.”