Yahoo Finance Beware of Red-Hot 3D Systems Corporation (DDD) Stock Ahead of Earnings
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
3D Systems Corporation (NYSE:DDD) stock has had quite the run into its second-quarter earnings report, due after the bell on Wednesday. Despite first-quarter earnings coming up short in early May, DDD stock is up 27% year-to-date. That compares favorably to a 10.5% gain for the S&P 500.
Source: Image via 3D Systems
What drives the big gains for DDD stock?
A lot of it is speculation about the success of 3D Systems and the 3D printing space at large. IDC recently said that 2016 was a banner year for 3D printing. Printer shipments were up 29% year-over-year, while revenues grew 18% year-over-year.
The reason for the success was the growth story really going global. The big-growth geographies were the Asia/Pacific region (excluding Japan), Central & Eastern Europe, and the Middle East & Africa.
IDC also found that the market leader in the 3D printing space was 3D Systems. DDD owns roughly 18.5% of the global market. Investors are clearly bidding up DDD stock as they expect this international growth narrative to prop up DDD results into the foreseeable future.
But there are problems with that bull thesis, and those problems make DDD stock a sell into its second-quarter earnings report.
Problems With The 3D Systems Bull Thesis
The problems with the DDD bull thesis are two-fold.
One, despite robust 3D printing growth over the past several years, DDD has been a zero-growth story on the topline. 3D Systems was once a company that saw huge growth rates on its topline. Revenues surged 45% higher in 2013 to $513.4 million. Then they jumped 27% the next year to $653.7 million.
But growth since has been muted. Revenues only grew 2% in 2015, and then they actually fell 5% in 2016. They were up just 3% in the first quarter of 2017, and are expected to be up just 5% this full year.
Why? Competition. As the 3D printing space has matured, so has the competition. This is causing 3D Systems’ revenues to be flat over the past several years, despite robust marketplace growth.
And that competition isn’t expected to ease up anytime soon. William Blair analyst Brian Drab said in a late June note that 3D distributors were switching to competitors like HP Inc (NYSE:HPQ).
The second problem with the DDD bull thesis is that those big international growth numbers won’t last for very long. An interesting sub-heading in the IDC report is that 3D printer shipments in North America were actually down in 2016. In 2015, though, 3D printer shipments were up 20% in the U.S. That is a sharp and abrupt reversal.
The same thing will happen in the international market because, at the end of the day, not many people actually need 3D printers. What will happen then? The 30% global growth narrative will turn into a flat growth narrative, and the DDD bulls will quickly run for cover.
DDD Stock Is Over-Valued
Let’s talk valuation.
3D Systems recorded non-GAAP earnings per share of 46 cents in fiscal 2016. The midpoint of management’s guide calls for that to grow 15% to 53 cents in fiscal 2017. That seems like an aggressive target. Revenues are only expected to grow 5%, so there is lots of operating leverage baked into DDD management’s EPS guide for fiscal 2017.
Nonetheless, even if 3D Systems does hit 53 cents in fiscal 2017, that is growth of only 15% year-over-year. Meanwhile, DDD stock is trading at 36-times trailing non-GAAP earnings per share. That multiple represents a huge premium to growth.
In the longer run, earnings growth for DDD is expected to flatten out to 10% per year. A 36 times trailing earnings multiple is a 260% premium to that long-term growth projection.
Bottom Line on DDD Stock
The valuation is simply too rich, especially considering that earnings growth is being driven mostly by operating leverage. There are only so many costs that come out of the operating model.
Eventually, 3D Systems is going to have rely on topline growth to fuel earnings growth. But the topline growth narrative is a mid-single-digit growth narrative at best. Competitive concerns and potential market saturation imply that zero growth on the topline is far more likely.
Essentially, once 3D Systems maxes out the number of costs it can take out of its operating model, the earnings growth trajectory could flatten out to zero. But DDD stock is trading at 36-times trailing earnings despite the potential for zero earnings growth in the foreseeable future.
That makes the stock a sell.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
More From InvestorPlace
The post Beware of Red-Hot 3D Systems Corporation (DDD) Stock Ahead of Earnings appeared first on InvestorPlace.
