The Shocking Truth About 3D Systems Corporation's Valuation

No matter how you cut it, shares of 3D Systems are expensive on paper. While this may scare many investors into missing out on a great opportunity, Foolish investors aren't ones to automatically dismiss "overpriced" stocks from becoming the latest additions to their portfolios. After crunching the numbers, the longer an investor holds 3D Systems starting from today, the better the chances that they'll stand to make a profit over the long term.

Setting the baseline
On a high level, 3D Systems is the of 3-D printing, aggressively investing to improve its long-term business prospects. The company has been deploying heaps of cash to make acquisitions, grow market share, and improve its technology. Consequently, 3D Systems' bottom-line earnings power is likely to remain constrained for the foreseeable future. This is why it's better to evaluate 3D Systems by how much investors are willing to pay for its revenues.

DDD PS Ratio (TTM) Chart

DDD PS Ratio (TTM) data by YCharts.

The chart above looks at 3D Systems' price-to-sales ratio, which divides the company's market value by its trailing-12-month revenue. The large uptrend indicates that the price of 3D Systems' stock has been growing significantly faster than its revenues. Compared to the S&P 500's price-to-sales ratio of about 1.7, it's safe to say that 3D Systems investors are paying a significant premium for its revenues. In fact, there are only a handful of publicly traded companies that have a higher price-to-sales ratio than 3D Systems.  

Getting realistic
You could easily argue that 3D Systems deserves to trade at a high premium to the market because 3-D printing offers tremendous disruptive potential to revolutionize how the world designs and manufacturers, and 3D Systems is a leading company in the space. However, investors should still expect that 3D Systems' price-to-sales multiple will eventually contract to a level more in line with companies or industries that have similar revenue growth trajectories and characteristics.

Over the last five years, Google has grown its revenues by nearly 18% per year, and over the next five, analysts expect revenues to grow by another 17% per year. Like 3D Systems, Google enjoys being a leader in its space and is often described as a disruptive company. Assuming 3D Systems can grow its revenues by a similar long-term growth rate, Google's current price-to-sales ratio of roughly 7 seems like an appropriate ballpark valuation estimate for 3D Systems.

Source: 3D Systems. 2014 midpoint and 2015 estimates provided by company.

While this may seem like a conservative estimate based on 3D Systems' current revenue trajectory, the 3-D printing industry as a whole is expected to grow by about 19.3% a year through 2021, and analysts expect 3D Systems to grow its revenues by about 23% per year over the next five years. Additionally, 3D Systems has made nearly 50 acquisitions in the last three years to help drive stronger revenue growth. Investors should probably discount this historically strong revenue growth rate to some degree.

The road to profit
In order to offset a price-to-sales multiple compression and corresponding falling stock price, 3D Systems' full-year revenue needs to grow in proportion to the compression. If 3D Systems manages to grow its full-year revenues faster than an ensuing price-to-sales multiple compression, investors will generate a positive return.

The presentation below outlines three different price-to-sales multiple compressions, each with four different desired long-term returns, and also the compounded annual revenue growth rate needed for investors to make a desired return, assuming they bought 3D Systems today and held through a specified year.


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