Shareholders of 3D Systems would probably like to forget the past six months even happened. The stock dropped 44.8% and now trades at $1.80. This was partly due to its softer quarterly results and 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? See what our analysts have to say in our full research report, it’s free.

Why Do We Think 3D Systems Will Underperform?

Even though the stock has become cheaper, we're cautious about 3D Systems. Here are three reasons why you should be careful with DDD and a stock we'd rather own.

1. Revenue Spiraling Downwards

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. 3D Systems’s demand was weak over the last five years as its sales fell at a 6.9% 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. Unfortunately, 3D Systems’s ROIC has decreased significantly over the last few years. 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 $68.85 million of cash over the last year, and its $225.6 million of debt exceeds the $135 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 falls short of our quality standards. Following the recent decline, the stock trades at $1.80 per share (or a forward price-to-sales ratio of 0.6×). 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 a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of 3D Systems

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