Growth Stocks: 3D Systems

3D Systems Corporation (DDD.US) operates in the crossroads of industrial manufacturing and cutting-edge technology, positioning itself for substantial growth through its offerings in both the industrial and healthcare sectors. This strategic focus serves as both a means to mitigate risks and a pathway for expansion. While the industrial sector provides a reliable source of revenue, the healthcare division within DDD holds even more significant growth potential, particularly in the realm of 3D printing. However, owing to its persistent lack of profitability at the core, assessing DDD's valuation can only be approached by considering its current book value and its potential for engaging in mergers and acquisitions. In light of the continual advancements in technology and ongoing M&A activities in the sector, I am of the opinion that DDD is currently undervalued.

A Holistic Business Strategy with an Embedded M&A Component

At the heart of 3D Systems Corporation lies its strategy of mergers and acquisitions, with the primary objective of securing pivotal positions in the market. The acquisitions of Titan Additive, Kumovis, and dp polar GmbH hold significant promise and create a synergistic blend of competencies spanning manufacturing, 3D printing, healthcare, and growth opportunities when integrated. To illustrate, Titan Additive possesses the potential to disrupt the automotive industry, historically known for its slow adoption of 3D printing technologies. Kumovis, with its healthcare focus, has the potential to become a cornerstone in the rapidly expanding domain of personalized medicine. Conversely, dp polar could introduce groundbreaking changes in mass production, leading to enhanced market reach. According to the latest earnings call, the company's future M&A strategy, including discussions regarding a potential merger with Stratasys (SSYS.US), is specifically crafted to rapidly expand DDD's reach.

Taking a closer look at DDD's most recent 10-Q filing, 3D Systems invested $37,726,000 in an all-cash agreement to acquire 93.75% of Kumovis GmbH, with an estimated additional redeemable non-controlling interest (RNCI) valued at $1,559,000. The acquisition of Titan Additive LLC was also conducted entirely in cash, amounting to $39,040,000. These financial commitments underscore the strategic significance that 3D Systems assigns to these acquisitions. For instance, Kumovis specializes in PEEK materials, known for their substantial medical applications, and the acquisition is projected to have short-term dilutive effects. On the other hand, Titan Additive offers a pellet-based extrusion platform that has the potential to open up new markets within the industrial sector.

Furthermore, the company has undertaken other noteworthy investments, including a joint venture with the Saudi Arabian Industrial Investments Company (Dussur), involving an initial investment of approximately $6.5 million, and a $10 million investment in Enhatch Inc. Collectively, these acquisitions form a key component of DDD's integrated business strategy. Through a growth-focused approach involving mergers and acquisitions, the company aims to diversify and fortify its position in both the healthcare and industrial sectors. Moreover, the overall financial commitment represents a significant endeavor, particularly when considering DDD's relatively modest market capitalization. In summation, these endeavors clearly reflect DDD's aspirations to swiftly expand its presence across various markets.

Source: IR DDD

Regrettably, 3D Systems' proposal to acquire Stratasys faced rejection, introducing an added layer of intricacy into 3D Systems' merger and acquisition strategy. Despite more favorable terms, Stratasys' reluctance to reopen negotiations underscores a fundamental disparity in strategic outlooks between the two firms. Jeffrey Graves, the CEO of 3D Systems, has conveyed that "no price would satisfy Stratasys' board," signaling the potential need for a strategic reassessment on the part of 3D Systems.

Nonetheless, considering the ongoing surge in mergers and acquisitions within the 3D printing sector, it is highly probable that 3D Systems will engage in an acquisition or merger in the foreseeable future. As this landscape of mergers and acquisitions continues to evolve, unforeseen developments should not be discounted. It is crucial to emphasize that, with sectors such as dental and bio-printing poised for transformation through 3D printing, 3D Systems must actively pursue expansion through complementary acquisitions.

Emphasis on Technological Advancement and Healthcare

However, technological innovation lies at the core of 3D Systems' strategy. The incorporation of software into a unified cloud-based system represents a profound shift in operational effectiveness. The notion of a 'digital twin' holds great potential, enabling real-time data analysis that could revolutionize the entire product life cycle. The complete process, from conception to retirement, can be made more efficient and enhanced through this approach, coupled with 3D printing, resulting in operational streamlining and heightened quality. This assumes particular significance in an industry where the expenses associated with prototype development can be substantial, making a digital alternative a game-changer.

Source: IR DDD

Moreover, 3D Systems' venture into regenerative medicine represents not only a business endeavor but also a profoundly promising development for humanity. The ability to employ 3D printing for organ creation could effectively eradicate the illicit organ trafficking market and reshape the ethical landscape surrounding organ donations. This also positions the company as an ethical biotechnology entity, a burgeoning niche market. From an investment standpoint, it could render the company's stock an appealing addition to specific ETFs adhering to corporate governance, ethical, and ESG mandates. This provides 3D Systems with added adaptability, as it might rapidly amass a substantial shareholder base, potentially serving as a tailwind for its stock price.

Risks and Pessimistic Factors

However, it is crucial to maintain a balanced perspective regarding DDD's prospects. The primary challenges facing DDD can be distilled down to stagnant revenue growth, debt obligations, and stock dilution. These concerns warrant a nuanced appraisal, especially in light of the company's apparent strategic realignment, with healthcare and 3D printing emerging as its primary growth drivers.

Consequently, when scrutinizing its historical revenue growth, it is imperative to contextualize this within the evolving focus of its business. A glance at DDD's SEC filings from five years ago reveals a geographically segmented business landscape, with healthcare playing a subsidiary role rather than taking center stage. Fast forward to the present, and healthcare has ascended in significance, meriting its own reporting segment alongside the industrial sector. While the challenges in the dental sector are disconcerting, they should be regarded as temporary setbacks within a broader, long-term strategy. Additionally, the healthcare sector typically exhibits resilience during economic crises and is swiftly becoming DDD's most lucrative segment (at least in terms of adjusted EBITDA).

With regard to DDD's debt, I posit that the issuance of the $446.5 million convertible note constituted a well-calculated risk with the potential for substantial rewards. It also fortified DDD's cash reserves, affording ample liquidity for operational needs while simultaneously facilitating further growth through future mergers and acquisitions, particularly if the company effectively leverages synergies in healthcare that enhance and expand DDD's 3D printing capabilities.

Contrary to the perception of high leverage, an examination of DDD's balance sheet reveals that only 31.5% of its assets are financed through long-term debt, and total liabilities constitute 48.8% of total assets, neither of which suggests excessive leverage. Hence, DDD's balance sheet exhibits robustness sufficient to support ongoing operations in the foreseeable future and may even accommodate a substantial M&A transaction (such as a merger with Stratasys).

source: Seeking Alpha

Lastly, 3D Systems' pursuit of mergers and acquisitions as well as its expansion endeavors necessitate investment, which it has, in part, financed through equity-based compensation since 2020. During this period, the outstanding shares have seen a modest uptick of 12.7%. However, the concurrent decline in 3D Systems' stock price from approximately $10 to the current level of $5.06 per share cannot be solely attributed to dilution. Moreover, stock dilution could be warranted if 3D Systems' healthcare-oriented focus continues to yield a robust adjusted EBITDA while concurrently easing short-term liquidity constraints.

Valuation Considerations

From a valuation perspective, 3D Systems appears undervalued, currently trading at a price-to-book (P/B) ratio of 0.95 and an enterprise value-to-sales (EV/sales) ratio of 1.38. These metrics are below industry medians of 2.52 and 1.69, respectively. Nevertheless, it is essential to acknowledge that 3D Systems exhibits negative free cash flow, amounting to approximately $70 million annually. Despite this, the company maintains a substantial cash reserve of $490.4 million, affording it ample financial flexibility to execute its strategic initiatives. However, given 3D Systems' persistent lack of structural profitability, its valuation can only be ascertained through its existing book value and its potential for mergers and acquisitions, rather than employing the conventional free cash flow analysis.

3D Systems chart

Currently, DDD is trading at its lowest historical price point, a level it first touched in 2020. Source: xStation

Moreover, looking back historically, DDD's stock reached a nadir of approximately $5.50, accompanied by a book value of $4.44 per share during the early stages of the COVID-19 pandemic. In contrast, its shares are now trading below that threshold despite boasting a higher book value of $5.33 per share, minus the additional uncertainties associated with the pandemic. Consequently, taken as a whole, it can be asserted that DDD is undervalued given its present stock price. Taking into account the significant drop from its 2021 peaks, I posit that DDD's downside potential is relatively limited at this juncture.

In Conclusion

3D Systems Corporation's strategic focus on industrial and healthcare solutions intersects with an integrated mergers and acquisitions strategy. While the thwarted Stratasys merger underscores the challenges of executing large-scale M&A deals, it also underscores the company's determination to lead the market. This determination is further corroborated by its technological advancements in healthcare and the concept of "digital twins," promising operational enhancements. This also aligns 3D Systems more closely with ESG investment criteria due to its ethical stance on regenerative medicine. Despite bearish financial concerns, these should be considered within the context of a strategic realignment and a balance sheet capable of supporting its growth aspirations. When evaluated through the prism of its M&A potential and strategic endeavors, DDD's present undervaluation renders it a compelling, albeit intricate, investment opportunity. Consequently, I opine that DDD offers favorable upside potential at its current levels for investors willing to navigate the ongoing mergers and acquisitions narrative.

Darío Garcia, EFA
XTB Spain