Brean Capital made a very gutsy call on Monday, saying that 3D Systems Corporation (NYSE:DDD)’ high short interest could create a squeeze after its earnings report. However, after 3D Systems’ 5% post-earning loss, the firm probably wished it had waited to make its call. Although, I like the call, and the excitement surrounding 3D printing, but is 3D Systems the best play in the space?
Bullish Call & Outlook
Brean Capital wasn’t the only firm to be bullish on 3D Systems Corporation (NYSE:DDD) in the days prior to earnings. Needham also predicted a strong quarterly performance. In addition, both firms are high on fellow 3D printing company Stratasys, Ltd. (NASDAQ:SSYS), and bullish calls caused both to rally 6% and 4%, respectively, in the day prior to 3D Systems’ earnings.
When you really think about it, both Brean and Needham were in a lose/lose situation when trying to call a post-earning rally. 3D Systems Corporation (NYSE:DDD) had traded higher by 400% since January 2012. Therefore, the stock needed perfection in order to trade higher. And while 3D Systems did trade lower after earnings, I thought its quarter was near flawless.
First Glance At The Q2 3D Printing Space
For Q2, 3D Systems posted revenue of $120 million ($6.17 million better than the consensus) but missed EPS expectations by $0.04, after posting $0.20. However, revenue grew a whopping 45% year-over-year; the company’s gross profit margin rose 51.8%; and the only reason that the company missed its EPS target is because they are investing money into growth, which is what I like to see.
Personally, I prefer a company that doesn’t rest on the expectations of Wall Street, and is willing to invest in order to grow in the future. The 3D printing space is a promising industry, but is also a fairly new space as it relates to consumers. The industry is at a crucial point in its history, where it needs to appeal to consumers, and 3D Systems Corporation (NYSE:DDD) is trying to penetrate this market aggressively.
3D Systems increased its R&D costs by 94.4% year-over-year, significantly outpacing revenue growth, and boosted SG&A by 50% in the same period. Some might say that this rise in costs is a warning sign that operating margins of 20% are not sustainable, but when you consider that 3D System has annual revenue of just $400 million, compared to HP’s $115 billion, you see that 3D Systems Corporation (NYSE:DDD) controls just a fraction of the overall printing market. Therefore, things such as peak sales, margins, and EBITDA efficiency are still hard to determine long-term.
The Best Investment In The Space
The big question after 3D Systems’ phenomenal quarter is whether the company is the best investment in the 3D printing space. Its competitors include Stratasys, Ltd. (NASDAQ:SSYS) and ExOne Co (NASDAQ:XONE).
Stratasys’ niche is the enterprise market, with printers that sell for $10,000-$600,000 per unit. However, the company is also a leader in 3D printing materials and is also making its entrance into the consumer business. ExOne Co (NASDAQ:XONE) operates in the industrial space, with high priced machines. In their last quarter, they sold just five machines but produced nearly $8 million in revenue. 3D Systems Corporation (NYSE:DDD) is more a quantity company, with a niche in the consumer space.
While all of these companies have their niche, they all operate in the 3D printing space. Let’s see how they compare.
|Market Cap||$4.5 billion||$3.4 billion||$830 million|
|Trailing P/E Ratio||108||N/A||N/A|
|Forward P/E Ratio||36.5||34.7||$100 million|
|Return On Equity||9.7%||(1.27%)||N/A|
|Revenue Growth MRQ||45%||116%||191.5%|
First off, let’s remove the monkey from the room, and address ExOne Co (NASDAQ:XONE), because although in the 3D printing space, it does not compare to Stratasys, Ltd. (NASDAQ:SSYS) and 3D Systems Corporation (NYSE:DDD). At this point, it is way too early to judge ExOne’s upside, as five devices sold last quarter does not give us an indication of long-term performance. We need to see ExOne Co (NASDAQ:XONE) consistently rise in printers sold, and maybe in a few years, we’ll be able to compare it better to its larger peers. As of this moment, 26 times sales looks to be quite pricey.
Now, like I said, 3D Systems’ quarter was great, but as I look at it and Stratasys, I can’t help but to think that 3D Systems Corporation (NYSE:DDD) is running in second place. Stratasys, Ltd. (NASDAQ:SSYS) has now entered the consumer business, and is soon-to-be the most diverse of any 3D printing company. In terms of valuation, Stratasys’ price/sales is only slightly higher, but its growth is more robust. Furthermore, with operating margins of 2.9%, Stratasys, Ltd. (NASDAQ:SSYS) has the potential to significantly expand its margins. Therefore, looking ahead, I believe that Stratasys is the best investment choice.
There aren’t too many industries that I’d buy at 12-15 times sales, but 3D printing is one of them. The printing space including consumer, commercial, and industrial is massive, and 3D printing has the technology to do something that HP could never accomplish, and that’s print actual products with the use of different materials. Hence, long-term 3D printing saves consumers and businesses money, which is why I think it will thrive, and that these stocks are worthy of their premiums.
The article Is There Still Upside in 3D Printing? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, ExOne, and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: short January 2014 $36 calls on 3D Systems and short January 2014 $20 puts on 3D Systems. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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