2023-09-20 03:39:34 ET
Summary
- 3D Systems Corporation is strategically positioned for growth in the industrial and healthcare sectors, with a special focus on 3D printing.
- DDD's M&A strategy aims to secure key market positions, as seen in its acquisitions of Titan Additive, Kumovis, and dp polar.
- While facing challenges in executing its M&A strategy, 3D Systems remains undervalued and has ample potential for growth in the 3D printing sector.
- While DDD faces risks like stagnant revenue growth, debt, and dilution, it appears to be significantly undervalued, making it a compelling investment opportunity.
- However, investors considering DDD must be willing to ride this investment through a potentially bumpy M&A saga.
3D Systems Corporation ( DDD ) operates at the intersection of industrial manufacturing and cutting-edge technology, positioning itself for transformative growth through its Healthcare and Industrial Solutions. This approach is both a risk mitigation tactic and a growth strategy. While the industrial sector provides a stable revenue stream, DDD's healthcare segment appears to have a higher growth potential, especially in 3D printing. However, due to its structural unprofitability, DDD's valuation can only be approximated by its current book value and M&A potential. I believe that given the ongoing technological advancements and M&A activities in the sector, DDD appears to be undervalued at current levels.
Business Strategy Coupled With Embedded M&A Optionality
At the core of 3D Systems Corporation lies its M&A strategy that aims to secure pivotal market positions. The acquisitions of Titan Additive , Kumovis , and dp polar GmbH are promising and create a synergistic blend of capabilities in production, 3D printing, healthcare, and growth potential when combined. Specifically, Titan Additive can potentially disrupt the automotive industry, which has historically been slow to adopt 3D printing technologies. Kumovis, with its focus on healthcare, could become a cornerstone in the rapidly growing field of personalized medicine. On the other hand, dp polar could revolutionize mass production, enhancing market penetration. According to the company's latest earnings call , its future M&A strategy, including merger talks with Stratasys (NASDAQ: SSYS ), is designed to achieve increase DDD's scale quickly.
Delving deeper into DDD's latest 10Q , 3D Systems spent $37,726,000 in an all-cash deal for 93.75% of Kumovis GmbH, with an additional estimated RNCI (Redeemable Non-controlling Interest) of $1,559,000. The acquisition of Titan Additive LLC was also an all-cash transaction, costing the company $39,040,000. These financial commitments indicate the strategic importance 3D Systems places on these acquisitions. For instance, Kumovis specializes in PEEK materials , which have significant medical applications, and the acquisition is expected to be dilutive in the near term. On the other hand, Titan Additive offers a pellet-based extrusion platform that could open up new markets in the industrial segment.
Moreover, the company has made other notable investments, such as a joint venture with the Saudi Arabian Industrial Investments Company ( Dussur ) with an initial investment of about $6,500,000 and a $10,000,000 investment in Enhatch Inc . In total, these acquisitions are part of DDD's embedded M&A growth strategy, which also diversifies and strengthens the company's position in the healthcare and industrial sectors. Moreover, the financial outlay as a whole is a significant financial effort, especially considering DDD's relatively small market cap. In sum, these show DDD's ambitions to scale and penetrate various markets quickly.
Unfortunately, 3D Systems' offer for Stratasys was rejected , introducing an additional layer of complexity to 3D Systems' M&A strategy. Despite the improved terms, Stratasys' unwillingness to engage in further negotiations highlights a fundamental divergence in strategic vision between the two firms. Jeffrey Graves, CEO of 3D Systems, has stated that 'no price would satisfy the Stratasys Board,' indicating that a strategic reassessment may be necessary for 3D Systems. Nevertheless, given the current flurry of M&A activity in the 3D printing sector, it is likely that 3D Systems will participate in an acquisition or merger at some point in the foreseeable future. As this M&A landscape continues to evolve, further unexpected developments should not be ruled out. Importantly, with sectors like dental and bioprinting poised for transformation through 3D printing, 3D Systems must aggressively pursue growth through synergistic acquisitions.
Therefore, the key takeaway is that, on the one hand, DDD has a promising M&A strategy to secure pivotal market positions, as evidenced by its acquisitions of Titan Additive, Kumovis, and dp polar. On the other hand, its failed attempts to acquire Stratasys reveal challenges in executing this strategy at a larger scale. After all, Stratasys appears to be an incredibly desirable acquisition target in the sector, and DDD's M&A plan was derailed. Additionally, the Stratasys saga serves as a cautionary tale that while 3D Systems is ambitious in its plans to dominate multiple sectors, there are significant hurdles, both in terms of stakeholder alignment and market valuation, that it must overcome to realize its vision. Currently, the clock ticks towards key decision points like the expiration of its Stratasys offer in October.
Technology and Healthcare Focus
Nevertheless, technological innovation is a cornerstone of 3D Systems' strategy. Integrating software into a unified cloud-based system represents a paradigm shift in operational efficiency. The ' Digital Twin ' concept is promising because it allows for real-time data analytics that could revolutionize the entire lifecycle of a product. The whole process, from conceptualization to decommissioning, can be streamlined and improved with this approach and 3D printing, leading to operational efficiencies and enhanced quality. This is particularly crucial in an industry where prototyping costs can be high, so a digital alternative can be a game changer.
DDD's latest earnings call slides.
Moreover, DDD’s foray into regenerative medicine is not just a business venture but also an exciting development for humanity. The ability to 3D print organs could eliminate the black market for organ trafficking and redefine the ethical landscape of organ donations. This also positions the company as an ethical biotech company, a niche though growing market. But from an investment perspective, it could also make the stock an attractive addition for certain ETFs with corporate governance, ethical, and ESG mandates. This gives DDD enhanced optionality because it could quickly gain a large shareholder base and be a tailwind for its stock price.
Risks and Bearish Factors
Nevertheless, having a balanced perspective on DDD’s prospects is important. In my view, DDD's key problems can be mostly summarized into stagnant revenue growth, debt, and share dilution. These concerns merit nuanced evaluation, particularly in light of the company's apparent strategic realignment towards healthcare and 3D printing as its primary growth catalyst.
Accordingly, when analyzing its revenue growth so far, it's important to contextualize it within its evolving business focus. If one looks at DDD’s SEC filings from five years ago, it reveals that its business was geographically segmented, with healthcare being just a component rather than a focal point. Fast forward to today, and healthcare has gained enough prominence to warrant its reporting segment alongside Industrials. While the downturn in the dental sector is a concern, it should be seen as a temporary hiccup in a broader, long-term strategy. Additionally, healthcare is often resilient to economic downturns, and for DDD, it’s quickly becoming its most profitable segment (at least in adjusted EBITDA terms ).
As for DDD’s debt, I think issuing the convertible note of $446.5 million was a well-calculated risk with potentially significant rewards. It also bolstered DDD's cash balance, giving it ample liquidity to operate while securing further growth through future M&A deals, especially if it successfully capitalizes on healthcare synergies that scale and develop DDD's 3D printing capabilities. Contrary to perceptions of high indebtedness, DDD's balance sheet shows that only 31.5% of its assets are financed by long-term debt, and total liabilities constitute 48.8% of total assets—neither of which indicates extreme leverage. So, DDD’s balance sheet is robust enough to sustain operations for the foreseeable future and could even digest a major M&A transaction (like a merger with Stratasys).
Seeking Alpha plus author's elaboration.
Finally, DDD's M&A strategy and expansion require investment, and over time, it has partly supported it with stock-based compensation as a financing method. Yet, since 2020 , shares outstanding have increased by a moderate 12.7%. But during the same period, DDD’s stock price declined from approximately $10 to the current $5.06 per share—a change that cannot be solely attributed to dilution. Furthermore, the dilution may be justified if DDD's healthcare focus continues to generate high adjusted EBITDA while alleviating short-term liquidity burdens.
Valuation Considerations
From a valuation standpoint, DDD appears to be undervalued, 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 the sector medians of 2.52 and 1.69, respectively. However, it's crucial to note that DDD has a negative free cash flow of approximately $70 million annually. Despite this, the company's substantial cash balance of $490.4 million provides sufficient financial runway and flexibility to execute its strategic initiatives. But, while DDD has promising M&A prospects, the unfortunate reality is that it remains structurally unprofitable. Hence, its valuation can only be assessed through its book value and M&A potential rather than traditional DCF analysis.
Moreover, from a historical perspective, DDD's shares reached a low of around $5.50, with a book value of $4.44 per share during the onset of the COVID-19 pandemic. In contrast, the shares trade below that level despite a higher book value of $5.33 per share, without the overhang of pandemic-related uncertainties. Hence, collectively, I'd argue that DDD is undervalued at its current share price. And considering the sharp decline from its 2021 highs, I believe that DDD's downside is relatively limited at this point.
Conclusion
3D Systems Corporation's focus on healthcare and industrial solutions intersects with an embedded M&A strategy. While the failed Stratasys merger underscores the challenges in executing large-scale M&A, it also reveals the company's ambition to be a market leader. This ambition is further evidenced by its technological innovations in healthcare and "digital twins," which promise operational efficiencies. This further aligns DDD with ESG investment criteria through its ethical stance in regenerative medicine. Despite bearish concerns around its financials, these should be contextualized against a backdrop of strategic realignment and a balance sheet that can support its growth ambitions. When viewed through the lens of its M&A potential and strategic initiatives, DDD's current undervaluation makes it a compelling, albeit complex, investment opportunity. Hence, I believe DDD offers upside potential at these levels for those willing to ride through the ongoing M&A saga.
For further details see:
3D Systems: The Future Of 3D Printing And Regenerative Healthcare?