3D Systems Corporation (NYSE:DDD)’s Q2 results shocked most investors. The 3D printing company had been targeting 30%+ organic growth rate. But organic growth plunged to just 10% in the second quarter. However, the company management believes that it was a function of timing. 3D Systems CFO Damon Gregoire told Morgan Stanley analysts Scott Schmitz and Katy Huberty that he was confident the company would achieve 30% organic growth rate over the next couple of years.

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3D Systems margins expected to improve

Morgan Stanley analysts initiated coverage of the stock with Equal weight rating earlier this month. Gregoire said at the International Manufacturing Technology Show in Chicago last week that new products, channel leverage and addition of metals to organic growth calculation should fuel growth in the current half of this year.

Operating leverage is also expected to improve, thanks to a rebound in growth rate and controlled OpEx investments. The Rock Hill-based company spends 30% of its sales on OpEx. However, Morgan Stanley said the operating leverage improvement is already factored into expectations. Wall Street expects the company’s Q3 and Q4 operating margins to come in at 19% and 20.8%, much better than 15.4% in June quarter. Morgan Stanley expects OpEx investments to affect margin improvements in the long-term.

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Execution risk remains high for 3D Systems

3D Systems favors a broad product portfolio as there are different processes to serve different use cases. Overlapping technologies create reduce the amount of required R&D compared to investing in many separate processes. Moreover, the company has an aggressive acquisition strategy. It usually targets early stage businesses that help it build vertical expertise. It may hamper short-term earnings, but offers more favorable valuations in the long run.

3D Systems’ new product launches, broad portfolio and expanding distribution may help it grow. The company management’s way of explaining its strategy makes sense. But Morgan Stanley analysts are skeptical about the acquisition success rate due to high execution risk.

3D Systems shares tanked 4.84% to $49.55 at 11:22 AM EDT on Monday.

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