3D Systems Corporation (DDD): Stratasys, Ltd. (SSYS) Buy Shows 3D Industry Getting Ahead of Itself

Even before it grows up, the 3D printer market is rapidly consolidating among two companies, Stratasys, Ltd. (NASDAQ:SSYS) and 3D Systems Corporation (NYSE:DDD).

Both companies have been on acquisition binges. The latest move in that direction is Stratasys, Ltd. (NASDAQ:SSYS)’s purchase, for $403 million, of MakerBot, a privately-held company in Brooklyn making low-cost printers that use plastic. The deal seems to value MakerBot at about eight times its annual revenues.

Stratasys gets a low end

MakerBot apparently moved in with Stratasys, Ltd. (NASDAQ:SSYS) in part because 3D Systems Corporation (NYSE:DDD), based in Rock Hill, South Carolina, already has a low-cost printer called the Cube, sold in Staples stores. The MakerBot costs almost twice as much as the Cube.

Stratasys, Ltd. (NASDAQ:SSYS) itself was formed just last year through the merger of a Minneapolis company called Stratasys, Ltd. (NASDAQ:SSYS). and Objet, an Israeli company. Yahoo! finance indicates trailing year revenue for Stratasys, Ltd. (NASDAQ:SSYS)of $267 million, which when set against a market cap of $3.27 billion, indicates a trailing-year price-to-sales ratio of well over 10.

The numbers are 3D’s

The industry’s growth rate can be better understood by looking at 3D, which has been public longer in its present configuration and thus has comparables you can look at.

At its present valuation of $4.27 billion, 3D Systems Corporation (NYSE:DDD) has a Price/Earnings (PE) multiple of over 97, and with $353 million in 2012 sales also has a price-to-sales ratio of about 12. Its March quarter sales of $102 million were about 25% ahead of the same quarter in March, when it brought in just under $78 million.

That’s not usually the kind of growth rate that would bring in that kind of multiple. What’s comforting for investors is that there are any profits at all – $5.88 million in the March quarter. The assumption is that you’re guaranteeing yourself a place in a paradigm-shifting market, something that’s currently a niche and has yet to rush through the heart of its growth curve. Like Apple before the iPod, but know that the iPod is out there.

Management at 3D has been working conservatively on their books even while buying out other companies aggressively. It made 16 acquisitions in 2011 alone, taking its debt-to-assets ratio over 25%, but slowed the pace in 2012 and gradually brought it down to its present level of under 10%. The company is not yet a huge generator of cash, however, and had just $110.54 million in cash on its books at the end of March.

The nature of the market

While products like MakerBot’s Replicator 2, for which it just built a factory in Brooklyn, NY, and the 3D Cube are the sizzle, the steak is in a wide variety of higher-priced products made for specialty industrial markets, ranging from dental implants up to jet parts.