3D Systems Corp (DDD) announced third-quarter earnings on Oct. 29 that were reported to be “in line with analysts’ expectations.”
I don’t pretend to know a great deal about three-dimensional printing beyond what I have heard and read. I work in accounts receivable financing, not for a tech company. Nonetheless, I am perfectly capable of understanding the fascination with and promise of the technology, and there is little doubt that it will have its place in the pantheon of tools used in manufacturing, and especially in the medical field.
Investors should not allow fascination to override sound judgement, however, and those with an interest in the 3D printing industry should consider some of the challanges that it currently faces. The materials used to fabricate these three-dimensional constructs, for instance, could present certain difficulties. I for one would not be comfortable taking a transoceanic flight in an aircraft whose parts have been fabricated from plastic on a three-dimensional printer; even if the medium were metallic, I would have serious concerns. The point is that this may relegate the value of three-dimensional printing to one of proto-typing. but I don’t want to minimize the value of this technology. It is nothing short of amazing.
Even assuming the durability of certain plastic “inks”, industrial-scale mass production is hardly feasible using a three dimensional printer, or printers. And even if one acknowledges that printer prices will fall over time, as is the case with most new technology, the concept of using these printers for mass production is unrealistic.
My point is that "amazing" alone will not be enough to provide a mass market for the technology. Its market will be limited primarily to proto-typing and hobbyists, unless some unforeseen breakthrough occurs with regard to “ink.” I certainly understand the value to industry in having a low cost methodology for developing proto-types, and in my view this will be the main driver for the sale of three dimensional printing technologies.
When it comes to medical applications, however, my view is far more optimistic. A company like Organovo Holdings, Inc. (ONVO) that uses this technology to advance medical breakthroughs makes a considerable amount of sense to me, as it obviously does to many eager investors.
Organovo is positioned at the intersection of 3D printing technology and unprecedented demand for organ tissues. The company uses a bio-ink created from the individual patient’s own organ cells to design new organ tissues that function exactly the same. This cutting-edge technology, which combines biology and 3-D printing, has so excited the investment community that the company's stock price has risen almost 230 percent in the last year. Organovo currently trades at around $7.50 per share, up from $4.05 per share in mid-June.
3D Systems Corp. has also benefitted from investor enthusiasm. With shares hovering around $48 in mid-June, it is now trading at around $60, which represents a 25% increase in share price. 3D’s performance as measured against the S&P 500 is also impressive, more than quadrupling the gains of the benchmark index. But then again, Facebook, Inc. (FB) the same thing.
As a prospective investor, I took a close look at what the analysts are forecasting for 3D Systems Corp. and found that seven respected firms had set price targets ranging from $55 to $65.
As a value investor, I looked to 3D’s fundamentals and was decidedly unimpressed with the price-to-earnings ratio, trailing and forward; this is another thing they share with Facebook. The price-to-earnings growth ratio for 3D Systems Corp. was equally disconcerting at 2.91, and I was not favorably impressed with its price-to-book of 7.29, nor its return on equity of 6.43 percent.
On a more hopeful note, however, the company's quarterly revenues and earnings are well into positive territory and its financial strength is off the charts with a current ratio of 5.79 and a debt to equity ratio of 3.8. 3D has amassed an impressive amount of cash in the past two quarters, but has also announced heavy expenditures for research and development, so don’t expect any significant gains in shareholder value. While sporting an impressive and useful technology, the company has failed to generate any meteoric rise in share price. In my view it has peaked, and as investors begin to recognize the practical limits of the technology, it may actually suffer a slight decline.
Though neither Organovo nor 3D will need to turn to an invoice factoring companies to raise money, given the fundamentals and as a value investor, I can’t recommend either stock.
However, Organovo is full of promise and potential. In my view, the market for organ transplants is many times that of 3D’s potential market. Any bio-tech stock is a significant risk, but even as a value investor, I would have to cast my vote for Organovo ahead of 3D. From the perspective of fundamentals, I can’t recommend one over the other, but my preference for Organovo is based on its tremendous upside potential, a potential that 3D Systems has not demonstrated to my satisfaction.
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