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Between an industrywide slowdown in customer spending, the threat of increased competition, lingering performance issues, and a highly volatile stock, 3D Systems (NYSE: DDD) appears to be a high-risk investment. On the other hand, 3D Systems has a diversified set of 3D printing solutions, strong balance sheet, a promising long-term growth opportunity, and its new leadership is focused on driving operational excellence.
All things considered, how risky is 3D Systems?
External risks are risks that 3D Systems faces and largely outside of its control. Currently, 3D Systems faces two major external risks.
The first is the customer spending environment, which has been weak since the start of 2015, putting 3D Systems' printer sales and total revenue under pressure over the past six quarters. Most recently, 3D Systems' printer sales fell 30% year over year while total revenue fell over 7% in the second quarter. The prevailing theory is that customers have an oversupply of 3D printing capacity on hand and it's prompted a slowdown in spending. Given the longevity and magnitude of the slowdown, it remains unclear how much longer it will persist.
The second major external risk facing 3D Systems is the potential impact that increased competition will have on 3D Systems' business. Carbon's recently introduced M1 and HP's upcoming Multi Jet Fusion printers both claim to be significantly faster than any printer from 3D Systems. The risk is that 3D Systems' offerings become inferior by comparison and results in the company losing market share. In other words, these new entrants threaten to undermine 3D Systems' competitive positioning in the market.
Unlike external risks, internal risks are largely within 3D Systems' control. This includes areas like execution, setting the right strategy, and ability to innovate. If management fails to deliver in areas that require its action, the company's reputation, competitive positioning, and business results could come under pressure.
For instance, if Carbon and HP's offerings are well received by customers and 3D Systems is slow to respond to these threats, it'll give Carbon and HP more time to extend their advantage and take market share from 3D Systems. In this case, 3D Systems' delayed action would affect the company's competitive positioning and business results.
3D Systems' financial risks could be viewed from two perspectives: the stock and the business. The stock perspective takes into account the company's valuation, while the business perspective takes into account the strength of its balance sheet.
Generally speaking, the higher a stock trades above its intrinsic value, the smaller margin of safety it offers investors. 3D Systems' stock currently trades around 31 times forward earnings, or at about a 72% premium to the small cap-focused Russell 2000 index's forward P/E of 18. Based on other popular valuation measures, 3D Systems' stock mostly trades at a significant premium to the S&P 500:
Data sources: Multpl, State Street Global Advisors, Yahoo! Finance, and The Wall Street Journal.
Although 3D Systems' stock is considered richly valued, its balance sheet remains strong. The company ended the second quarter with $176.3 million in cash and zero debt. Since the fourth quarter of last year, 3D Systems increased its cash balance by $20.6 million, thanks to positive operating cash flow that more than covered the business' other cash needs.
The bigger picture
When determining a stock's riskiness, it's important to consider both sides of argument to see how they balance each other out. Then there's the question of whether owning a stock that's been as volatile as 3D Systems is appropriate for an individual's risk tolerance.
Ultimately, 3D Systems' riskiness appears to be a mixed bag, hinging on management's ability to successfully navigate the challenges it faces. However, since 3D Systems' new leadershipis largely unproven in this respect, it's yet another risk factor to consider.
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Steve Heller owns shares of 3D Systems. The Motley Fool recommends 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.