3D Systems’s 29.8% return over the past six months has outpaced the S&P 500 by 21.2%, and its stock price has climbed to $2.29 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy 3D Systems, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think 3D Systems Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on 3D Systems for now. Here are three reasons we avoid DDD and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. 3D Systems’s demand was weak over the last five years as its sales fell at a 6.7% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, 3D Systems’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
3D Systems burned through $94.23 million of cash over the last year, and its $136 million of debt exceeds the $95.54 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the 3D Systems’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of 3D Systems until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
3D Systems doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at $2.29 per share (or a forward price-to-sales ratio of 0.7×). The market typically values companies like 3D Systems based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at the Amazon and PayPal of Latin America.
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