3D Printing Companies Have a Long Road Ahead (HPQ, DDD, SSYS)

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3D printing companies - 3D Printing Companies Have a Long Road Ahead (HPQ, DDD, SSYS)

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Ummm, correct me if I’m wrong, but weren’t shares of 3D printing companies like 3D Systems Corporation (NYSE:DDD) and Stratasys, Ltd. (NASDAQ:SSYS) supposed to be flying through the roof by now?

3D Printing Companies Have a Long Road Ahead (HPQ, DDD, SSYS)That was certainly the assumption back in 2013, when DDD stock was sitting on top of a 171% rally for that calendar year and SSYS stock doled out a 60% advance of its own for the same timeframe, largely spurred by projections of exponential growth of the 3D printer market. With both now more than 50% below their late-2013 peaks (and still knocking on the door of lower lows), to say 3D printing companies have been a disappointment would be an understatement.

There’s a “why” to the meltdown. If you can face some cold hard facts, keep reading.

3D Systems is Selling the Dream

Confession: Back in mid-2013 when stocks of 3D printing companies were going nuts, I was certain there was more hype than substance to the mania. After having nearly two years to think about it, though, and watch the data pile up, I’m changing my tune ... slightly.

Though hype still ruled the day and ended up punishing stocks of 3D printing companies over the course of 2014 because of it, I believe there is a fairly solid revenue-bearing market here for 3D Systems, Stratasys and their competitors. The problem is, there’s going to be a minimal level of near-term profit margins for most of these companies, especially once Hewlett-Packard Company (NYSE:HPQ) wades waist-deep into these waters.

That’s a tough idea to swallow in light of the results 3D Systems reported last week. The company turned $187.4 million in revenue last quarter into an operating profit of 21 cents per share of DDD stock. Both topped their year-ago comparisons, though both fell short of estimates. Analysts were looking for a top line of $202.3 million and per-share earnings of 25 cents. Full-year results were similarly short of estimates. Still, non-GAAP net income of $23.2 million translates into net profit margins of a palatable 12.4%.

The company is optimistic about its long-term prospects too. 3D Systems offered 2015 earnings guidance of 90 cents to $1.10 per share of DDD stock, on revenue of somewhere between $850 million and $900 million — with a large chunk of both materializing in the latter half of 2015. Both ranges were in line with existing analyst estimates.

3D Systems CEO Avi Reichental said of the past and future:

“As expected, higher spending levels in support of our expansion plans pressured our earnings throughout 2014, as we fast-tracked assembly of the talent, assets and infrastructure required to take our business to the next level. Having completed this investment phase, we expect to recover our operating leverage and expand our profitability throughout 2015.”

In other words, the company had to spend heavily in the recent past in order to get positioned for maximum profits in the future. It’s not abnormal. Indeed, it’s encouraging on the surface, and DDD stock edged as much as 3% higher after the news was released.

All the same, little of that explanation was actually “new” or surprising. So why are shares of DDD stock still on the cusp of new 52-week lows, down 68% from their January 2014 peak? For that matter, why are stocks of most 3D printing companies deep in the red for the past year even with recent upticks?

Answer(s): Because investors have seen this hype-to-bust-to-recovery process too many times before, and know it takes far longer to work through than 3D Systems seems to want to believe.

The Valuation of DDD Stock Isn’t the Problem

At a trailing price-to-earnings ratio of 282.1, DDD stock isn’t going to win any value awards. The forward-looking P/E of 24.2, however, is much more palatable … still sky-high, but nothing tech investors haven’t stomached before. Indeed, if 3D Systems remains on its current growth trajectory, one could see a forward-looking P/E of 22.8 based on 2016’s projected per-share profits of $1.31.

The stumbling block is the “if”.

The fact that DDD stock and stocks of other 3D printing companies are all well down for the past year or so is the strongest empirical possible evidence that most investors simply don’t see this industry living up to previous and current lofty expectations. Then again, who can blame investors? The 3D printing fervor looks and smells an awful lot like stories that have burned them before.

One such example was the solar craze of 2007/2008.

You may recall solar stocks were all the rage in 2007, as the technology was finally becoming financially feasible. A flood of new manufacturers piled in, chasing too few dollars and ultimately saturating the market. Many had to fold after only a short while in the business simply because the supply greatly exceeded demand. But, it was one heck of a story in its infancy, even if reliable profits wouldn’t materialize until years later.

Rare earth metals is another example of exuberance gone overboard.

In 2010 when electric vehicles and wind power were becoming a common reality, it became “clear” the world was going to need a massive amount of rare earth metals to move ahead with these earth-friendly initiatives. Rare earth prices soared as a result. A company called Molycorp Inc (NYSE:MCP) went public specifically to reopen a mothballed rare earth mine in Mountain Pass, California.

It didn’t pan out, at all. Shares of Molycorp have lost nearly 100% of their value since their 2011 peak … a peak that was more than 500% above the 2010 IPO price. As it turns, demand for rare earth metals hasn’t run rampant, and they’re not as rare as investors were sure they were in 2010.

The same kind of unmerited mania can bamboozle investors on a stock-specific level too.

Remember how Groupon Inc (NASDAQ:GRPN), the daily-deal couponing company, was all the craze before it went public in late 2011? The stock fell like a rock right after it debuted, and the sellers didn’t even think about looking back until Groupon shares had lost 90% of their value by late 2012. The business model at that time just wasn’t sustainable, and it wasn’t clear if profits were ever going to be achievable. Investors mentally shelved the stock and haven’t it given it a second thought in the meantime.

Funny thing though… most investors might be surprised to learn Groupon swung to a legitimate profit last quarter, and is expected to post a full-year profit in 2015 — now that nobody’s interested.

Now What for 3D Printing Companies?

There are some stark parallels among those three scenarios and the situation 3D printing companies are in now, the most prevailing of which is the fact that it all started with extreme hype.

Fans and followers of SSYS and DDD stock and their peers will rightfully point out that unlike solar stocks, Groupon and most rare earth miners, most of the major 3D printing companies are profitable. Fair enough. But, those margins could be firmly pressured sooner than later.

In the same sense, too many solar panel companies came on the scene in 2008 and too many rare earth miners opened up new mines in 2010 (because the market looked lucrative at the time), a plethora of new 3D printer companies are starting to chip away at the industry’s primary names.

And it’s not just the threat of powerhouse Hewlett-Packard launching a new line either. Kickstarter has a handful of companies ready to put product on shelves (Stacker is one of them). Flashforge is already turning heads. A company called New Matter is close to making a 3D printer that’s simple enough for children to use. Add Formlabs and MarkForged to the list of up-and-coming 3D printing companies, along with new ones that seem to pop up every week.

All of a sudden, reality strikes — 3D printers are becoming a commodity, and the only way to win a commodity war is to wage it with lower prices. Good-bye, margins.

That’s not a predilection of doom for 3D Systems and Stratasys, but it is a suggestion that remaining on top and remaining profitable is going to be very difficult to do in the 3D printer business for a while, especially if those companies are counting on sales of consumer products to fuel growth. Competition is going to be fierce.

There is a light at the end of the tunnel for 3D printing companies, however. Eventually, some printer companies will fall by the wayside, and production costs will continue to fall, as was the case with solar panels. A lot of competition for Groupon faded away as well. Rare earth mineral prices are finally on the mend for the right, fundamental reasons.

Simultaneously, both Groupon and solar panel makers simply got better at doing their jobs. 3D printing companies will do the same. It’s not a process that’s completed in a matter of months, though. It could take years for the industry to find a reliably-profitable footing worth investing in.

Owning SSYS, DDD stock and most other 3D printing names is going to be tough to do between now and then.

Perhaps 3DPrintingStocks.com founder Gary Anderson offered the best and simplest take on the matter in early February when he said ” I think if your investment horizon is beyond 12 months, you can hold. If it’s less than that you might consider selling now and looking for a lower entry.”

That sounds like good advice, though all the kinks may not even be worked out in 12 months.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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