Shares of 3-D printer makers 3D Systems (DDD) are down 36 cents, or 0.8%, at $47.31, while shares of competitor Stratasys (SSYS) are off 41.11, or 1.2%, at $89.80, after both stocks were cut to Underperform from Market Perform by William Blair‘s Brian Drab this morning, writing that although he has a “positive outlook for the additive fabrication industry,” nevertheless expectations are too high for both companies....MORE
The shares fetch 45 and 49 times, respectively, his earnings projection for this year, which he notes is above long-term average multiples of 30 to 32 for both.
Drab attributes health in the stocks of late to media frenzy about the trend to low-cost manufacturing, and the limited number of “pure plays” to invest in — DDD, SSYS, and The ExOne Company (XONE), and the companies themselves have contributed to that hype.
But none of these companies is as much a leader as hype would suggest, he opines:
Although the additive fabrication industry has existed for over 20 years, the technology did not receive attention from the mainstream media until recently—and now there are dozens of favorable articles written about the industry every week. Most of the media coverage focuses on two trends in the industry: 1) the potential proliferation of low-cost, personal 3-D printers (with excitement around this idea driven to new levels recently after the announcement that Staples (SPLS) will begin selling a 3D Systems printer in June), and 2) the so-called third industrial revolution (i.e., additive fabrication increasingly replacing traditional manufacturing processes). 3D Systems offers personal 3-D printers (Stratasys does not; the lowest price point at Stratasys is $9,900), but we do not expect revenue from personal printers to be material for 3D Systems in the near term. We perceive the personal printer product line at 3D Systems to be more of an awareness building tool than a revenue generator (at least over the next few years). Regarding the third industrial revolution, neither 3D Systems nor Stratasys appear well positioned to be the leader of such a revolution, in our opinion. Although additive fabrication technologies offered by 3D Systems and Stratasys are, in some cases, used to manufacture end-use parts, these cases are almost exclusively limited to low-volume, highly customized applications (particularly when material strength is not critical). The primary use of the technology offered by both companies is the manufacture of prototypes [...] We believe consistent positive commentary from 3D Systems could be contributing to the rapid appreciation in shares of 3D Systems and Stratasys, potentially setting investors up for disappointment. For example, in a July 2012 interview on CNBC, CEO Abraham (“Avi”) Reichental said that his company’s position as a provider of technology that helps companies bring new products to market faster makes 3D Systems “somewhat recession-proof.”The companies’ fundamentals won’t live up to the hype, he opines:
3D Systems has acquired 32 companies since August 2009. The first concern (an obvious one) that we have with this strategy is that the company has been closing an acquisition about every 42 days for over three years, activity that clearly consumes much of management’s time [...]
It was ever thus.
And the stocks don't really seem to care. SSYS is down $2.18 at 88.72 after hitting an all-time high of $94.90 on Tuesday.
DDD is down 59 cents at $47.08. All-time high $51.94, also on Tuesday.
