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Is Proto Labs About to Duplicate the ExOne Collapse?

As Proto Labs (NYSE: PRLB  ) gains day after day, investors need to be reminded of ExOne's  (NASDAQ: XONE  ) stock collapse in the related rapid prototyping sector. Like ExOne , Proto Labs stock soared to $80 from below $30 during the last year. . But after ExOne shares' major collapse in the last month, Proto Labs' investors need to understand that further stock gains could set it up for a similar fate.

Proto Labs is a quick-turn manufacturer of custom parts for prototyping, while ExOne develops machines for producing additive manufacturing parts -- commonly referred to as 3D printers. In general terms, these two stocks work to improve the process of developing new products. Both companies' quick revenue growth has led to massive share-price gains that their respective fundamentals probably don't support.

Why did ExOne collapse?

The good news for the bulls on Proto Labs is that ExOne collapsed based on a secondary stock offering, in which insiders dumped over $120 million worth of stock at prices 30% below the recent highs prior to the offering. In addition, the company has continuously missed analyst estimates since coming public. That combination doesn't exactly help a stock maintain a lofty valuation, especially after it's soared 200%. 

ExOne does provide an interesting investment theme, since it's developing large, industrial 3D printers. The long-term growth potential for additive manufacturing appears enormous, but the investment community got ahead of itself on this one. While the market valuation quickly reached nearly $1 billion, the average analyst revenue estimate for 2013 didn't even reach $50 million. The discrepancy was so great that insiders were quick to unload shares causing the stock to plunge nearly 45% in just a month.

As the below chart highlights, Proto Labs now has the biggest gains in a group that includes 3D Systems (NYSE: DDD  ) and Stratasys (NASDAQ: SSYS  ) over the last year:

PRLB Chart

PRLB data by YCharts

Why Proto Labs could be next

Similar to ExOne, Proto Labs has seen its stock make substantial gains. The stock is now worth more than $2 billion while the company isn't even expected to reach $200 million in revenue next year. Investors need to remember that these companies deal with product developers and a manufacturing process that doesn't lend itself to growth rates in the 50% range questioning why investors would generate Facebook type multiples for the stock.

The company commissioned a couple of studies that estimated the market value for quick-turn manufacturing at around $6 billion, a substantially greater sum than the company's revenue. There's no doubt that plenty of growth opportunities exist, but unique developers of products in need of quick-turn manufacturing served by Proto Labs only grew to 6,885 during Q2 2013, or 18% higher than the 5,625 in the same quarter last year. Sure, those developers will continue to spend more with ProtoLabs, but the developer growth rate had already declined from 23% in the previous year.

Higher multiples than 3D printers

Incredibly, while 3D printer makers 3D Systems and Stratasys created investor buzz for improving the manufacturing process via additive manufacturing and rapid prototyping, Proto -- the mostly ignored quick-turn prototyper -- has the sector's highest earnings multiple.

Perhaps investors have gotten sidetracked by 3D Systems and Stratasys's constant mergers, allowing Proto Labs to enjoy the higher multiple. Stratasys is busy incorporating the MakerBot acquisition  to provide it with consumer-grade 3D printing machines, which would complement the large industrial printers it already produces. 3D Systems seems to announce a small acquisition each month that constantly leads to questions from analysts regarding organic revenue growth rates. 

Bottom line

Similar to ExOne, Proto Labs is now priced for perfection, but the stock hasn't reached the outlandish level of ExOne before that company's share collapse. While the market for speeding up the manufacturing process continues to need improvements, investors are now ignoring any possibility of the negatives involving the company or the sector. New competition could be around the corner or insiders could dump shares.The possibility even exists that 3D printing could eventually replace the injection molding capabilities of Proto Labs, allowing for customers to print products directly.

Any long-term investor needs to understand that as the stock of Proto Labs continues to rise, it's set up for a collapse like ExOne's.

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  • Report this Comment On October 16, 2013, at 9:09 AM, RedandBlack wrote:

    So the stock is going to collapse because it's multiple is outlandish? I'm pretty sure that's a poor reason to expect a drop on an individual stock. If investor psychology turns against the stock I'd agree that we could see a drop but not because it's "overpriced" (whatever that means). Same could be said of many many stocks--not just PRLB.

    By the way PRLB and addictive manufacturers have very little overlap in customer base and comparing the two doesn't make much sense. PRLB uses traditional manufacturing techniques combined with cutting edge software to turn much larger volumes in very short time frames. Addictive manufacturing may get their volumes capability up one day but not any time soon.

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