Regardless of the insight of the analysis you can count on a "Barron's effect" on Monday.
For the record we are not fans of DDD, VJET or XONE. Arcam and Stratasys have better technology.
If you want to remain exposed to the group short DDD/long SSYS may be an acceptable dirty hedged pair trade.
The new technology may hold great promise, but the stocks do not. Why the industry darling could tumble 80%.
It was meant to be the moment science fiction finally met reality. This past January, makers of 3-D printers reserved 7,000 square feet worth of space at the Consumer Electronics Show. At their introductory press briefing, CES organizers described how 3-D printing was driving a new industrial revolution. The Las Vegas show floor was littered with small boxes spitting out plastic figurines and minimalist jewelry. Not exactly the stuff of a new world order in manufacturing, perhaps, but the tech world nevertheless declared 2014 the year of the 3-D printer.Here's the 1-year spaghetti chart of the five stocks, note VJET did not come public until October, 2013.
Wall Street has been well ahead of the hype. Shares of 3D Systems (ticker: DDD), the industry's largest pure-play stock, are up 370% over the past two years. Stratasys (SSYS) is up 231%. And since their 2013 initial public offerings, ExOne (XONE) and Voxeljet (VJET), are up 140% and 166%, respectively. Each of the companies has a slightly different focus, with 3D Systems increasingly tied to consumers and Voxeljet strictly focused on large-scale industrial machines.
In each case, though, investors are missing the point -- and overpaying in the process. Yes, 3-D printing holds vast potential; it could eventually reshape U.S. industry. But that's because of its applications in industrial manufacturing, which the publicly traded 3-D outfits don't address as effectively as some private companies. The systems of those private firms have been embraced by the likes of General Electric (GE). The industrial conglomerate is currently using 3-D printers to manufacture key parts for its next-generation jet engines.
Pure plays in 3-D printing, meanwhile, seem more interested in consumer novelties and the hobbyist market. Consider Rock Hill, S.C.–based 3D Systems, with a market value of $7 billion. At CES, the company unveiled a dozen new printers, including a sub-$1,000 version of its entry level Cube printer. A few days after the show, 3D issued a press release touting a partnership with Hershey (HSY) to create an in-home chocolate factory. The plan, 3D said, is "to explore and develop innovative opportunities for using 3-D printing technology in creating edible foods, including confectionery treats."
The day of the announcement, 3D Systems shares closed up 3%. The company has a ChefJet sugar and chocolate printer slated for delivery in the second half of the year.
But lately, 3D Systems has grown better at printing press releases than profits. The company has repeatedly missed its own earnings forecasts, while lowering the bar for the future. Early last month, shares fell 20% after management warned about fourth-quarter earnings, blaming higher spending on research and development.
The stock recovered, before falling to a recent $69. Investors have made a habit of overlooking bad news from 3D Systems. A year ago, analysts thought the company would generate $1.31 a share in earnings for 2014. Today, the forecast stands at 82 cents per share. The 37% haircut has been accompanied by a 110% gain in the stock, and Wall Street remains as bullish as ever. Fourteen analysts rate 3D Systems a Buy and four a Neutral. Just three rate the stock as Sell or Underperform.
3D Systems is expected to earn $85 million on revenue of $702 million this year. It currently trades at 84 times earnings, a wild multiple for a company likely to see per-share profit decline by three cents this year.
The hot story for investors is 3D Systems' 37% sales growth. But even on that basis, the valuation looks stretched. At 13 times last year's revenue, 3D Systems is the third most expensive technology stock in the Standard & Poor's 1500, behind only Facebook, at 23 times, and Visa, at 15. Investors are pricing all of the 3-D pure plays at premium valuations; Stratasys, ExOne, and Voxeljet all carry double-digit sales multiples.
Facebook and Visa have unique networks and some power to dictate pricing on its products. 3D Systems is driving down the price of its printers, trying to compete with a wave of upstarts.
FOR ALL THE ATTENTION ON 3D Systems, Stratasys boasts the world's largest installed base of 3-D printers, with roughly 65,000 systems. In 2010, Stratasys partnered with Hewlett-Packard to manufacture 3-D printers under the HP brand. By mid-2012, the companies had canceled the deal, offering little explanation. HP recently said it plans to enter the market, though details are scant.
In 2014, Wall Street sees Stratasys revenue growing 39%, to $674 million, with profit of $117 million, or $2.21 a share, a 20% gain.
As for Germany-based Voxeljet, which has a market value of $540 million, it sold a total of three printers in its most recent quarter, for $2.5 million. This was actually better than a year earlier, when the company sold two used printers. For 2014, analysts expect Voxeljet to earn $1.1 million, or seven cents a share, on revenue of $18 million. The stock recently traded at $35.
"Investors love organic revenue growth," says Whitney Tilson, manager of hedge fund Kase Capital and co-founder of the Value Investing Congress. "The problem is that you really have to differentiate between organic revenue growth and profitability."
Tilson calls 3D Systems a "dream short," and he has been adding to his own short position of late. He's betting against four other 3-D printing names, as well, which he declined to name. "These stocks are being valued as if this is the next coming of the iPhone and iPad combined," he says. He describes walking around CES seeing dozens of companies hawking essentially the same thing. "There was booth after booth of companies with very similar products to 3D Systems. And at lower prices."
He thinks 3D Systems would be generously valued at three times revenue, which would put the stock at $15, 80% below its recent close.
WHILE CES ATTENDEES were gawking at the 3-D showcase in Las Vegas, game-changing developments were taking place 2,000 miles away in Cincinnati, the home of GE's aerospace unit....MORE
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