3D Systems Corporation (DDD)’s Earnings: The Good, the Bad, and the Crazy

3D Systems (DDD)Well, folks, you know you’re dealing with a high-flying growth stock when the company reports 54% sales growth, beats earnings expectations, forecasts 24%-37% sales growth for next year and as much as 38% earnings growth … and the share price tanks. That’s exactly what happened to the decades-old leader in 3-D printing and newly minted media darling 3D Systems Corporation (NYSE:DDD) when it reported earnings last week. After a blowout fourth quarter and fiscal year, shares plunged as much as 15%. So what happened? And what should investors make of it all? Let’s dig in.

The bear case
Fool contributor Alex Planes makes the case that investors reacted reasonably and negatively to a few numbers in the earnings report. He points out that the projected 2013 growth rates are significantly slower than 2012′s growth rates. Alex also notes that despite growing 54% year-over-year and beating analyst estimates for full-year 2012 revenue, 3D Systems Corporation (NYSE:DDD)’ fourth-quarter revenue came in 2.2% lower than analyst estimates, at $101.6 million rather than the expected $103.9 million.

Alex attributes slowing growth to 3D Systems Corporation (NYSE:DDD)’ aggressive strategy of purchasing competitors. In 2012, 3D Systems Corporation (NYSE:DDD) enjoyed 54% growth but only 22% organic growth. With acquisitions acting as the company’s growth engine, Alex rightfully concludes that there are only so many companies 3D Systems Corporation (NYSE:DDD)  can buy, putting a ceiling on growth prospects.

The bull case
On the other hand, Fool contributor Steve Heller urges investors to be patient, arguing that the long-term thesis for 3-D printing remains intact despite temporarily slowing growth. Three-dimensional printing will be a $6.5 billion industry by 2019, from only $1.7 billion in 2011. That’s a strong and growing market, and Steve argues that 3D Systems is among the best-positioned companies to capitalize on it.

So who’s right? Maybe both. Wall Street would obviously like to see growth rates steady or increasing, rather than dropping, and that could account for a short-term sell off. However, over the week 3D Systems actually made up most of the ground it lost on Monday, closing Friday down only 3%. That indicates that not much about the long-term thesis has changed.

Get while the gettin’s good
It’s true that 3D Systems’ rapid acquisitions policy has fueled growth, but I’m not sure this is a bad thing. One charge frequently lobbed at the big 3D printers, 3D Systems and Stratasys, Ltd. (NASDAQ:SSYS) , is that even though the 3-D printing market is growing rapidly, the industry is pretty fragmented and there’s no telling who the eventual winners will be. However, investors looking to capitalize on the broad trend have limited options in getting exposure to this market, so many of them have piled into 3D Systems and Stratasys, pushing their share prices to astronomical heights.

You can look at this as the start of a bubble, but 3D Systems and Stratasys are both using their lofty stock prices to aggressively consolidate the market. Stratasys’ share price propped up an influential merger with major provider Objet, while in 2012 alone 3D Systems raised $107 million from common stock offerings to deploy for acquisitions. If management can continue to use their bubbly stock prices to firm up market share in an undeniably fast-growing market, I think investors today will be rewarded for bidding up shares.

Split decision
So what accounts for the past week’s dramatic price swings? This isn’t the most popular opinion, but I suspect that 3D Systems’ oddly timed 3-for-2 stock split had something to do with the sell-off. 3D Systems didn’t just increase the number of shares outstanding by 50% on the same day of its earnings release, it also released its earnings report to analysts only 20 minutes before hosting the earnings call. This is highly unusual, and it didn’t give analysts a lot of time to examine the earnings numbers, something CEO Abraham Reichental got chastised for on the call. This might have led hurried investors to compare Wall Street earnings per share pre-split estimates with actual results and management guidance that reflected post-split numbers.

For example, before the split analysts estimated that 2013 earnings per share of $1.58. If the split had never happened, management’s earnings guidance would come in at $1.50 to $1.73 per share, making the analyst estimate at the low end. Adjusting for the split, management guided $1.00 to $1.15, which looks like a huge miss. Of course, a stock split is all about appearances, and even if it looks like a miss at first, the earnings guidance was still a hit.

That might be why the stock has rapidly recovered over the week, as panicked sellers realized their mistake or created buying opportunities for others. It’s an excellent case study in why one should never buy or sell just because everybody else seems to be. It also raises a question: Why in the world would 3D Systems bother splitting their stock at all? Management said the split would “increase the market liquidity and broaden our investor base,” but it’s not as if 3D Systems is Berkshire Hathaway Inc. (NYSE:BRK.A), trading for $150,000 per share. Shares were trading around $60, and a 3:2 split puts them at $40. Who are these investors who want to buy shares of 3D Systems at $40, but were completely priced out of the market at $60?

Bottom line
As confusing and confused as the stock split may have been, nothing in Monday’s earnings changes the long-term thesis for owning 3-D printing stocks. This remains a highly speculative industry fueled more by expectations and emotions than earnings, and it will remain so for years. As I wrote last week, investors in 3-D printers shouldn’t just expect volatility; they should stop worrying and learn to love it. Whenever you see big price movements, just return to your original thesis and ask if anything has happened to change it. Don’t try to follow momentum.

The article 3D Systems’ Earnings: The Good, the Bad, and the Crazy originally appeared on Fool.com and is written by  Daniel Ferry

Fool contributor Daniel Ferry owns shares of 3D Systems and Stratasys and has the following options: short May 2013 $40 puts on 3D Systems, and short Mar 2013 $60 puts on Stratasys. For those unfamiliar with options, all of these strategies are optimistic, and the author profits if the stock price of either of these companies stays high. The Motley Fool recommends and owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!