What Does 3D Systems Have Against Profits?

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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3D Systems Corp. is one of those bubbly 3-D printer stocks that have come to epitomize today's frothy market valuations. Its shares fell 15 percent yesterday after it said fourth-quarter earnings would fall short of earlier forecasts. I can't help but wonder if the drop heralds a broader shift in the market's willingness to stomach meager profits at hot companies.

One quote in particular from the company's chief executive officer, Avi Reichental, caught my attention: "We are willing to tolerate earnings reduction and even slight gross profit margin compression during this period to substantially accelerate our growth rate and market share," he said.

That line used to work better than it did yesterday. At some point investors are bound to ask: Why are they so willing to tolerate this? Sure, the explanation has a certain appeal. Who could be against managing for the long term? Yet it also looks like something that a highly promotional company might use as an excuse for subpar earnings power.

The notion of sacrificing earnings today for greater riches tomorrow is one that investors grew accustomed to hearing from certain companies in popular sectors during last year's meltup. It has been a common refrain at Amazon.com Inc., for instance, and Salesforce.com Inc., which sells cloud-based software. There's no telling how long investors will be willing to live with this explanation.

Profits -- as in real earnings, not the goofy "pro forma" kind using make-believe accounting metrics -- do matter. So does valuation. Just look at Twitter Inc., which isn't profitable. Its shares fell as much as 24 percent today after posting disappointing quarterly results, although the stock is still ludicrously expensive at 44 times revenue.

Even after yesterday's tumble, 3D Systems still trades for more than 140 times earnings and 13 times revenue. (Its stock was trading this afternoon at about $66, giving it a $6.8 billion market value.) The company, in line with the prevailing Wall Street practice, has trained investors to disregard its results under generally accepted accounting principles and focus instead on non-GAAP earnings. At 3D Systems, those exclude the following: "amortization of intangibles, non-cash interest expense, acquisition and severance expenses, litigation settlements, loss on conversion of notes and stock-based compensation expense." You know, all those things that are normal costs of doing business.

On that basis, the company said yesterday that its 2013 earnings would be in the range of 83 cents to 87 cents a share, below its previous forecast of 93 cents to $1.03. And that certainly looks better than 43 cents to 45 cents, which is what 3D Systems said its GAAP earnings would be. Investors seem to be content living in this alternative reality for now. But the market's mood swings are cyclical, and there will again come a day when it isn't willing to play along with these games.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net