While the technology holds great promise, Barron’s argued that the stock valuations are far too optimistic — DDD stock currently is the third-most expensive tech stock in the S&P 1,500, trading at 13 times sales — and it suggested that the stocks of 3D printing companies could fall by as much as 80%.
To say that 3D printing companies are volatile investments at the moment is an understatement. If you’re an investor, you must temper your enthusiasm and craft a plan of action that allows you to benefit from this developing technology while limiting your downside.
Here’s what I’d do to get ahead of the curve.
3D Systems (DDD): A Valuation Conundrum
In February, Whitney Tilson called 3D Systems among the “great shorts” that exist in the market right now. He went on to suggest that the current market is better for shorting than October 2007, and quite possibly as good as March 2000. That’s not exactly a bullish sentiment, but can you blame him? DDD’s enterprise value is 59 times EBITDA. Of all the 3D printing companies, it’s actually the cheap one in the bunch.
So what’s reasonable, then?
I think most people would consider Google (GOOG) a technology company despite the fact most of its revenue is from advertising, and its enterprise value is 20 times EBITDA. GOOG saw operating earnings in fiscal 2013 grow 9.5%. In comparison, 3D Systems saw its operating earnings increase 34% in the past year. By this measurement, you would have to believe that DDD stock would be valued at more than 20 times EBITDA.
How much more is the million-dollar question.
To be on the conservative side, I’m going to suggest that DDD stock be valued halfway between GOOG and its own current valuation. That would suggest an enterprise value of $4.5 billion, or 40 times EBITDA. Its market cap would be $4.8 billion or $46.50 per share — 25% lower than yesterday’s closing price of $62.09.
If Tilson is to be believed, it makes complete sense to wait for DDD stock to fall into the mid-$40s before buying!
What About the Other 3D Printing Companies?
3D Systems’ competition include Stratasys (SSYS), XONE and VJET. Their current valuations are even more dear than DDD stock. Of the trio, SYSS appears to have the best chance of giving DDD stock a run for its money. I think it’s fair to also value SSYS stock at 40 times EBITDA, which translates into a $77 share price — 31% lower than yesterday’s close.
While it’s safe to say that 3D printing is the real deal, you have to wonder whether all of the current 3D printing companies will be around once Hewlett-Packard (HPQ) and some of the other big boys decide they want to own this market space.
Laugh all you want about Hewlett-Packard’s blunders in recent years, but it still has the financial wherewithal to capture a market if so desired.
All this said, how should you play the 3D printing market?