Why 3D Systems Was a 4-Bagger in 2012
Jan 3rd 2013 8:00AM
Updated Jan 4th 2013 5:10PM
3D Systems was the market's second-best-performing stock in 2012, according to Investor's Business Daily. The provider of 3-D printers saw its shares rise 271% during the course of the year, which was almost a four-bagger for investors in this innovative company.
That remarkable one-year return wasn't a surprise to Motley Fool co-founder David Gardner. He recommended the company in his Stock Advisor newsletter in January 2012, and he's extremely enthusiastic about the prospects for 3-D printing technology going forward.
Given that many investors want to learn more about this area, we thought it might be helpful to run David's original recommendation in its entirety on Fool.com. Below you'll find the write-up exactly as it appeared in the January 2012 issue of Stock Advisor.
David Gardner's Top Pick for January 2012:
Suds are spilling out the side of your dishwasher, and you need to replace the little plastic bracket that stops them. No problem -- just get the specs online and print out the part. Or you're designing a new laptop and you want to get a feel for the ergonomics, so you print out a model. Or maybe you need a hearing aid fitted exactly to your ear, so a technician prints out a custom earpiece.
If all that sounds like sci-fi, that's because for most of human history, making things has been a process of subtraction. Michelangelo said, "Every block of stone has a statue inside it, and it is the task of the sculptor to discover it." But technology developed since the late 1980s has made it possible to do additive manufacturing -- laying down only what we want with little or no waste. (Think Michelangelo's David without all the dust.) Sometimes called 3-D printing or rapid manufacturing, the revolution began with my recommendation this month, 3D Systems.
In 1986, Charles Hull coined the term "stereolithography" to describe a process during which print heads deposit very thin layers of resin in an exact location, building a finished, 3-D object one layer at a time. Hull founded 3D Systems that same year, and he remains the company's chief technology officer.
Additive manufacturing has made great advances in speed, accuracy, and quality since its early days, and it's now being eagerly adopted by many industries that ignored it for decades. That shift is reflected in the company's growth; in the 18 years between 1991 and 2009, revenue advanced at a 10.2% compound annual rate, but in the past two years, top-line growth has jumped to an annual rate of 41%.
Once a way to make a one-off prototype, 3-D printing is now used for all kinds of high-value, low-volume functional parts -- specialty tools, parts for fighter jets, and other objects with complex geometries that would be difficult or impossible to manufacture conventionally. 3D Systems offers parts made not just from a variety of tough plastics, but also waxes, nylons, rubbers, metals, and composites. That makes its offerings attractive to all kinds of industries.
The Future Is Now
Companies' newfound love of additive manufacturing has brought 3D Systems consistent profitability and improving margins. Management believes revenue will hit $400 million to $500 million over the next three or four years -- an inexact target, but one that suggests 24% annual growth in the near future. I think the stock price could double over a similar period. If 3-D printing takes off among individual consumers, even that target could prove conservative.
And no company is doing more to advance that next revolution than 3D Systems. At this year's Consumer Electronics Show, the company launched Cubify.com, a forum where consumers can access design tools, share 3-D designs, and even sell their creations. Objects can either be printed and delivered through 3D Systems' network of service providers on professional machines, or made at home using the company's 3-D printer called the Cube, which retails for $1,299.
Even more tempting for everyday users, 3D Systems' "Kinect-To-Print" application uses Microsoft's Kinect -- yep, the hands-free Xbox game controller -- as a 3-D scanner. That and other tools offer what the company calls "coloring-book simplicity" for creating designs. We think such ease of use will eventually bring 3-D printing into the home, with huge implications for a variety of industries -- and huge profits for 3D Systems shareholders.
Risks and When We'd Sell
3D Systems' chief rival is Stratasys , another excellent company I recommended over at Rule Breakers. While I obviously like both companies, Stratasys uses different technology and has focused mostly on high-end printers. 3D Systems, in contrast, has made a greater effort to bring 3-D printing to consumers. It also has a different business model, focused not just on selling printers and supplies (a classic razor-and-blade model) but also snapping up a number of service companies that create objects on spec. Its large installed base drives a high level of recurring revenue, powering about 70% of sales.
The other significant industry player, Objet Geometries, is reportedly planning an IPO for this year -- something that should bring more attention to the industry, although the company has yet to file. [Editor's Note: Objet ultimately merged with Stratasys in December 2012.] I'm not worried, though; I think this is a case where better, more widely accessible technology lifts all boats. There's room for more than one player here, and 3D Systems has a host of advantages.
3D Systems' acquisitions are another potential risk. While most have been relatively small service providers, the company issued $152 million in debt to pay for Z Corp., which will also add to the $82 million in goodwill it already carries on its balance sheet. The company's strategy of growth by acquisition has also obscured the fact that organic growth has slowed somewhat -- it was about 20% for the first nine months of 2011, versus 27% in 2010. The debt should be manageable, but we'll be keeping an eye on organic growth as well as looking for margins to keep climbing. We're counting on this business to boom, and if it stumbles, we'll print ourselves a pair of walkin' shoes.
The Foolish Bottom Line
Companies are already embracing additive manufacturing like never before, and tomorrow we may all be printing up our own bling. With change coming so fast, it's hard to know what the future of 3-D printing will look like. That's why 3D Systems offers the industry's broadest range of solutions -- high-end systems, low-end printers, service agencies offering a variety of materials and capabilities. Unless the world suddenly goes flat, 3D Systems should continue to drive a powerful -- and profitable -- trend.
-- David Gardner, January 20, 2012
What's Inside Supernova?
3D Systems is a perfect example of the innovative growth companies favored by David Gardner, whose stock picks have resulted in average returns of over 113% in our Stock Advisor service since it launched in 2002. Those returns have beaten the market by more than 87%. David has managed to trounce the market by always being on the lookout for revolutionary stocks and recommending them before Wall Street catches on to their disruptive potential. If you're interested in how David picks his winners, click here to get instant access to a personal tour behind David's Supernova service.
The article Why 3D Systems Was a 4-Bagger in 2012 originally appeared on Fool.com.John Reeves has no positions in the stocks mentioned above. The Motley Fool owns shares of 3D Systems, Microsoft, and Stratasys and has the following options: short JAN 2014 $55.00 calls on 3D Systems and short JAN 2014 $30.00 puts on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Microsoft, and Stratasys. 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.
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