Can 3-D Systems Live up to Expectations?
3-D printing veteran 3D Systems reports fourth-quarter results on Monday morning next week. Expectations are sky-high: The stock has soared 166% over the last year, despite losing some steam in the final stretch. Shares plunged 6.7% today and more than 16% since Feb. 11.
Analysts expect the company to report adjusted earnings of $0.38 per share, up 137% from $0.16 last year. Sales should jump nearly 50% to $104 million. With numbers like these, it's easy to see why investors are excited about the stock.
Just how realistic are these soaring targets?
Word on the Street
3-D Systems analysts have actually been pretty reliable so far. When they err, it's been on the side of caution. Earnings estimates have been spot-on for two of the five quarters in 3-D Systems' young history as a public company, with solid beats in the other three periods. The story is the same on the revenue line. So it's not like Wall Street likes to set unreachable targets for this company.
Analyst targets are also pretty much in line with management guidance. The company raised its full-year targets three months ago to account for strong demand in the third quarter. In particular, CFO Abe Reichental based his estimates on the company's position to "monetize the expanding rapid manufacturing and health care opportunities in the emerging consumer opportunities." In other words, there's a quickly growing market for printing custom medical devices and other highly specialized consumer-oriented parts.
Now, the 3-D printing industry has come under fire from skeptics calling it a bubble with unsustainable valuations. These stocks sure shouldn't appeal to traditional value investors -- 3-D systems trades at 29 times forward EBITDA estimates, rival Stratasys Systems goes for 27 times EBITDA, and brand-new upstart ExOne a hair-raising 139 times. They also sell at very large multiples to current and forward sales, and don't look cheap in any light I can think of.
You get what you pay for!
But huge growth never comes cheap. That's one of the core tenets of our Rule Breakers newsletter, which often recommends big winners at seemingly insane prices -- and has more than doubled the S&P 500's returns since 2004 with that strategy. Stratasys is not only a recommendation here, but a core holding. Fool founder David Gardner, who manages Rule Breakers, has also recommend 3-D Systems in our Stock Advisor service -- twice! The stock was recently picked as a "best buy now." The man clearly believes in 3-D printing, even at these supposedly crazy prices.
3-D printing in general is poised to turn the manufacturing world upside down. The devices are inching down into affordable territory for common American households, and could soon become as mainstream as smartphones and single-serve coffee makers are today. When that happens, all three of these companies should start growing into their valuation on the back of exploding demand for renewable printing supplies. It's the old razor-and-blades models all over again.
Who do you love?
3-D Systems has a leg up on the competition in terms of scale with 70% higher sales than Stratasys and a much larger gap down to little ExOne. The company is also growing faster than Stratasys while maintaining comparable margins. If I had to pick one 3-D printing stock to buy today, 3-D Systems would be it.
That being said, I wouldn't back up the truck just yet. Yes, 3-D Systems is likely to meet or beat analyst targets next week. No, it's not a 100% guaranteed outcome. This is still a young and immature market, and the ride will be bumpy. If this turns out to be the first time 3-D Systems misses earnings estimates by a penny, the market reaction will be brutal.
There's no particular reason why it would happen right now, but serious investors must consider the possibility. For the love of money, don't buy a pack of short-dated call options right now. Give the company some time to grow into its breeches. If you believe in 3-D printing as a long-term revolution, investing by thirds is not a bad idea.
3D Systems is at the leading edge of a disruptive technological revolution, with the broadest portfolio of 3-D printers in the industry. However, despite years of earnings growth, 3D Systems' share price has risen even faster, and today the company sports a dizzying valuation. To help investors decide whether the future of additive manufacturing is bright enough to justify the lofty price tag on the company's shares, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In our report, we take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell, and receive a full year of analyst updates with the report. To start reading, simply click here now for instant access.
The article Can 3-D Systems Live up to Expectations? originally appeared on Fool.com.Editor's note: To clarify the disclosure position outlined below, The Motley Fool owns shares of 3D Systems through both our Supernova and Pro real-money premium services. In addition to the shares it owns, our Pro premium service has written a "covered strangle" options position on 3D Systems, agreeing when the trade was set up to buy more shares at a lower price, or to sell existing shares at a higher price - while maintaining the ability to close either obligation any time. Finally, 3D Systems is a recommendation in Stock Advisor, which is not a real-money service.
Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings or follow him on Twitter and Google+.
The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.