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.