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Morningstar | Raising FVE After 3D Systems Records Strong Top-Line Growth in 2Q. See Updated Analyst Note from 08 Aug 2018

We have raised our fair value estimate for no-moat 3D Systems to $14 per share from $12 after second-quarter results finished higher than expected. We increased our projected 2018 revenue growth to 7% from over 3%. After 3D Systems posted 11% consolidated revenue growth over the second quarter last year, our 2018 revenue target is $690 million, but we expect weaker gross profit margins, down 80 basis points. During the second quarter, 3D Systems recorded $176 million in revenue on robust 41% printer revenue growth and 37% printer unit growth. Materials, on-demand manufacturing, and healthcare solutions also drove top-line improvements.

Compared with last year, operating expenses rose 7% on 13% higher selling, general, and administrative costs. Even with added investments in IT infrastructure and higher compensation costs, total operating expenses consumed nearly 53% of 3D Systems’ total revenue, down from 55% in the prior year. Our model includes an operating loss in 2018 and an operating margin improvement of less than 200 basis points compared with 2017.

Management suggested third-quarter revenue will be flat with last year, but fourth-quarter revenue will improve with new product launches. We chose to raise our 2018 forecasts after considering the uplift 3D Systems will receive from its growing printer installed base and higher utilization, in conjunction with the slate of new product rollouts in the second half of the year. We expect lower sequential growth through the end of the year, reflecting typical market reactions ahead of new product introductions. We forecast average annual revenue growth of over 6% through 2020, with 3D Systems generating positive operating income in 2020 versus negative 4% margins in 2019.

While we largely agree with CEO Vyomesh Joshi’s razor-and-blade business model for 3D printing, the rapid evolution and chronically short product lifecycles for new printers means a high degree of compatibility across product generations (for consumables, software, and so on) is a necessary but not sufficient requirement for longer-term strategic success. New products are the lifeblood of any 3D printer manufacturer and the critical element in restoring growth in the fast-paced 3D printing industry. 3D Systems is embarking on a broad series of new product launches across virtually its entire ecosystem in the coming months, the first of its kind under Joshi’s leadership. The foundation is the versatile Figure 4 production printer, with a scalable, modular design aimed at high-speed finished-part printing that will in turn drive high-volume sales of materials and services. It is one that must prove successful to fend off challenges from powerful new and recent entrants, including General Electric, HP, and privately held Carbon. A parallel goal is to deepen penetration of healthcare markets in general and dental applications in particular. The firm increased its healthcare revenue a robust 26% during the quarter, driving consolidated services revenue to an all-time record.