by Will Ashworth | March 12, 2014 8:47 am
3D printing companies such as 3D Systems (DDD), ExOne (XONE) and Voxeljet (VJET) haven taken it on the chin the past couple days thanks to a cautionary piece in Barron’s published over the weekend.
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.
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!
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?
When it comes to 3D printing companies, the best stocks to own in my mind are either Stratasys or 3D Systems. However, neither SSYS nor DDD make sense until they’ve taken a 30% haircut from current prices. If the markets keep moving higher, it’s going to be awfully difficult for investors to get their price. But don’t despair — eventually, intrinsic value will meet market value and a buying opportunity will arise.
Until then, you’ve got a couple of options in the ETF realm that give you exposure to 3D printing companies while not fully committing.
The first idea is to buy the PowerShares DWA Technology Momentum Portfolio (PTF), a group of 50 technology stocks exhibiting above-average relative strength. Chosen from 3,000 stocks traded on U.S. exchanges, both DDD and SSYS are in the top 10 holdings with weightings of 3.47% and 3.36%, respectively. If you believe both of these stocks are good long-term prospects but feel there is a possibility 3D printing companies might be in for a bit of a dive over the next few months, the diversification provided by the other 48 stocks should be enough to weather the storm. On the other hand, if they go up rather than down, you get to participate in that appreciation.
A second, less tech-related fund is the Guggenheim S&P MidCap Pure Growth ETF (RFG). It invests in 94 mid-cap growth stocks including DDD, which is the 15th-largest holding at 1.63%. I prefer this option because it virtually eliminates any risk of investing in 3D printing companies but provides a little upside should DDD take off while owning some great midcaps such as Trinity Industries (TRN), SVB Financial (SIVB) and Under Armour (UA).
I don’t think there’s any doubt that 3D printing serves a purpose in our world. I’m just not convinced that it’s going to be the game-changer people think it will be.
The four 3D printing companies I’ve discussed in this article are up an average off 89% over the past 52 weeks — 68 percentage points higher than the S&P 500. Those same four stocks have combined annual revenues of just more than $1 billion with limited earnings. One can’t help but consider them overvalued.
Until profits increase to justify loftier valuations, I’d either wait for a big decline in the stocks of 3D printing companies or buy one of the ETFs to tide you over until they do.
Buying at today’s prices appears fraught with risk.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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