Violent Moves In 3D Printing Stocks Underscore Why Valuation Matters

3D printing stocks - Violent Moves In 3D Printing Stocks Underscore Why Valuation Matters

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In the 3D printing world this week, it was a tale of two cities. On one hand, you had 3D Systems (NYSE:DDD). The 3D printing company missed quarterly revenue and earnings estimates while implying a weak guide. DDD stock dropped nearly 30%. On the other hand, you had Stratasys (NASDAQ:SSYS). That 3D printing company beat quarterly revenue and earnings estimate while delivering an above-consensus guide. SSYS stock popped by 20%.

Why the big divergence? Is Stratasys dominating 3D systems in a resurgent 3D printing industry? No. The divergence is due entirely to valuation and expectations. Quite simply, DDD stock had rallied big over the past year and run up to unreasonable valuations. SSYS stock had done neither of those. Thus, even those these two companies reported nearly identical numbers with single-digit revenue growth and margin improvements, those numbers boosted SSYS stock and tanked DDD stock.

What’s the next move? Broadly speaking, the 3D printing industry is not entering some renaissance period. DDD stock was acting like that. Now, it’s correcting downward. By the same token, the 3D printing industry isn’t dying, either. SSYS stock was acting like that. Now, it’s correcting upward.

These corrections seem mostly over. Both SSYS and DDD stock now trade at historically normal and comparable valuations. Thus, from current levels, these stocks should work.

The 3D Printing Industry Isn’t Booming, But It Isn’t Dying, Either

The 3D printing industry has gone boom and bust once before. But, that won’t happen again. Instead, the 3D printing industry going forward is one defined by stable and garden-variety growth.

The first boom and bust happened back in 2013. Back then, 3D printing stocks were rallying on the idea that 3D printers were the next big consumer technology. The assumption was that 3D printers were the natural upgrade from 2D printers and that, over time, every 2D printer would eventually be a 3D printer.

That never happened. Consumers didn’t buy 3D printers en masse, and the whole industry went bust.

There have been murmurs time and time again that the 3D printing industry is ready for another boom. As it turns out, 3D printing has promising professional enterprise applications across various industries, like aerospace, automotive, medical, retail, military/defense and other professional services. Growth through enterprise markets was supposed to reinvigorate growth back to 2013 highs.

But recent quarterly numbers imply that isn’t the case. Granted, enterprise demand is reinvigorating revenue growth. Not back to 2013 highs, however. Revenue growth last quarter was 8% at 3D Systems and 4% at Stratasys. Those are garden-variety growth rates.

They should remain that way for the foreseeable future. The truth is that enterprise demand will continue to grow, but it will grow at a slow rate. In the big picture, the enterprise applications of 3D printing are rather narrow in scope, and businesses are in no rush to rapidly up spend on 3D printer products and services. As such, growth should remain stable but mild over the next few years.

Thus, the 3D printing industry isn’t booming. It isn’t dying, either. Instead, it is simply growing at a gradual rate and will continue to grow at a gradual rate for the foreseeable future.

3D Printing Stocks Should Work Once Valuation Is Reasonable

Some investors believed the 3D printing renaissance hype. Others didn’t. The ones who did piled into DDD stock, which had reported a robust double beat quarter in August that implied a boom could be coming. Those who didn’t believe the hype sold SSYS stock, which didn’t have the same growth numbers as 3D systems to support this 3D printing renaissance theory.

Net result? Year-to-date, heading into their Q3 prints, DDD stock and SSYS stock had diverged dramatically. DDD stock had rallied nearly 100% and was trading at 2.8X trailing sales. SSYS stock had dropped 5% and was trading at 1.5X trailing sales.

For context, these two stocks usually mirror each other and trade at comparable valuations. Every once in a while, DDD stock pops and trades at a markedly bigger valuation. But, those periods of euphoria always end with DDD stock dropping back to SSYS valuation levels.

That is exactly what is happening now. SSYS and DDD reported very comparable numbers. Only DDD stock dropped and SSYS stock popped. Now, both stocks trade around the same valuation, with DDD stock trading at 1.9X trailing sales and SSYS trading at 1.8X trailing sales.

These levels seem fair. Over the past three years, a 1.8 sales multiple has acted as a baseline for 3D printing stocks. Dips below it have been buying opportunities. Rallies way above it have been selling opportunities.

The current fundamentals are better than they have been. Revenue growth is improving at both DDD and SSYS, as are margins. Thus, these stocks deserve to trade above the historical baseline sales multiple of 1.8.

With both stocks currently trading around that level, I think both DDD and SSYS will work from here. I don’t expect huge gains. But, I do think SSYS stock will continue to rally, while DDD stock could have a near-term bounce back.

Bottom Line on 3D Printing Stocks

Whenever 3D printing stocks are priced as if another boom is going to happen, sell and get out of the way. Likewise, whenever these stocks are priced as if another bust is going to happen, buy and wait for the rally.

The reality is the boom-bust nature that has historically defined 3D printing, no longer defines it today. Instead, this is a stable and mild growth industry, so big dips should be bought and big rallies should be faded.

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

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