There are three sides to every stock story, but investors often focus on one at the expense of the others. It's great to find strong buy signals, but what happens if your favorite stock is flashing a warning sign instead? With that in mind, we'll take a look today at 3-D printing pioneer 3D Systems' (NYS: DDD) pros and cons, to determine whether investors and would-be investors should dive in with both feet or wait for the water to warm up a bit more.
3D Systems is undeniably a market leader in an emerging technology. At the moment, it has only one serious competitor in Stratasys (NAS: SSYS) , which recently merged with Objet, 3-D printing's third major player. The company's revenue, net income, and free cash flow have all been trending solidly upward after recovering from the recession:
3D Systems is also trying to get a leg up on Stratasys by making a major push for the home user. Its plug-and-play printer and community model is the first of its kind. The Cube (and its Cubify.com community) appears to combine Hewlett-Packard's (NYS: HPQ) successful razor-and-blade-style printers-and-ink model with Amazon.com's (NAS: AMZN) loss-leading Kindle-Fire-plus-content-sales sales plan. Like both of these established plans, scale will matter, so 3D Systems will need to make itself appealing to more than the hobbyists who have thus far dominated the low end of 3-D printing.
The company's also made a number of acquisitions of various sizes and offers a wide range of products and services. Its distinct offerings range from medical uses to aerospace applications, and its service revenues are increasing at a rapid clip.
With big potential comes big risks, and 3D Systems is not risk-free. As you saw in the first graph, 3D Systems' net income hasn't kept pace with its revenue growth, and as a result the company's net margin has been in decline for several quarters:
3D Systems, like its rival, remains largely dependent on corporate clients, and most of those clients are facing tough times of their own. A number of the company's clients are automakers or defense contractors, both of which are in particular trouble. Ford (NYS: F) , for one, is dealing with both long-term structural buying shifts and massive ongoing pension liabilities, which might make it less likely to invest in non-core capital spending.
The home-user push holds future promise but also presents a threat. 3D Systems is hardly alone in designing consumer machines, and it also faces challenges from existing design communities. The Cube prints only in brightly colored plastic, but other online 3-D printing and design communities also offer items printed in metals, stones, glass, or ceramics. These items are often designed by talented modelers and are shipped to buyers' doors. Let's face it -- many more people appreciate 3-D designs than can actually create them effectively.
It's tough to say how big the 3-D printing market will get, and how quickly it can reach maturity. 3D Systems isn't cheap and currently trades at the high end of its valuation range. That doesn't mean it doesn't have a bright future, but it also makes the stock a bit riskier, especially since it's trading at all-time highs:
Long-term investors may want to ride out the current global turmoil and pick up shares if (or when) they suffer a decline. The company's next earnings report is scheduled for the end of July, and that may provide valuable clues for the year ahead. A number of companies have already lowered guidance heading into the summer, but 3D Systems has stuck to its guns thus far. A clearer picture will emerge if the numbers change in either direction.
I've long been bullish on 3-D printing, and I recently made 3D Systems one of my favorite companies in a tale of technology's evolution over the next five years. With that in mind, I still understand its risks -- but I think the long-term rewards will be worthwhile if you choose to buy in today. Remember, long-term investing means being able to handle declines that you know will be corrected in the future. 3D Systems is one of my best outperform picks in Motley Fool CAPS, and I plan to keep my call active for years to come. Do you feel the same? Let me know if I've missed anything in my analysis with a comment.
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At the time thisarticle was published Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter,@TMFBiggles, for more news and insights. The Motley Fool owns shares of Amazon.com, 3D Systems, and Ford and has written calls on 3D Systems. Motley Fool newsletter services have recommended buying shares of 3D Systems, Amazon.com, Stratasys, and Ford and creating a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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