Will 20% Sector Growth Support the Outrageous Multiples of 3-D Printing Stocks?

A recent report by the Feedonia group is bullish on 3-D printing growth through 2017, but industry numbers make one question the valuations of 3-D printing stocks. Typically, investors are willing to pay up for fast-growing stocks, but in certain scenarios the price paid can rob growth from future years. Review the Internet bubble years and see how even the top stocks spent years -- if not the next decade -- with revenue growing and the share price flat to down.

In this case, the top 3-D printing stocks -- 3D Systems (NYSE: DDD  ) , Stratasys (NASDAQ: SSYS  ) , and ExOne (NASDAQ: XONE  )  -- trade at earnings and revenue multiples suggestive of explosive growth. In reality, industry demand is expected to grow around 20% according to Feedonia through 2017, or at about the same rate as the last five years. Other widely respected industry resources, such as Wohlers, place the growth at higher rates. Either way, the market growth is solid and supportive of strong stock valuations, but the gains in this sector in 2013 have priced in years of substantially higher growth.

Big daddy valuation
With 3D Systems surging roughly 100% since its lows back in October, the stock now trades at a multiple nearly 70 times 2014 earnings. Also, the company has a market valuation approaching $10 billion, with revenue expected to generate only 29% growth to reach $663 million. Another concern for investors is that its organic revenue growth rates tend to be low, considering the large number of deals 3D Systems makes each year.

In the third quarter of 2013, 3D Systems reported total revenue growth of 50%, with 30% overall organic growth. Organic growth is important because it measures the ability of the company to grow long term without the help of dilutive buyouts. A prime example of the importance of organic growth without dilutive acquisitions can be seen by looking at 3D's metrics on a per-share basis while considering the substantial increase in outstanding shares. The total shares increased to 102.4 million in the third quarter of 2013 from nearly 85 million last year. While total sales grew 50%, the per-share-revenue growth was only 23%. Even worse, earnings per share only grew 19% in the third quarter compared to the same period of 2013. Going forward, this dilution will only be warranted if the acquired companies can grow at respectable rates.

Considering that earnings and revenue per share only grew 20%, 3D Systems is very expensive; it trades on a multiple of 63 times forward earnings.

Big mergers, outsized gains
Stratasys has made two large mergers to consolidate the 3-D printing sector with the buyouts of Objet and MakerBot. The stock has soared, factoring in growth for years into the future. Objet provided access to the larger industrial printing sector while MakerBot brought Stratasys into the consumer segment. Both acquisitions provide huge benefits, but the company doesn't come without risk -- a valuation that is 58 times 2014 earnings estimates has risk baked in. The most important number to consider is that earnings are only forecast to grow 26% for the year.

The 3-D printing market is exciting -- it seems as though inventions are unveiled daily. For example, in December MakerBot introduced six new PLA filament colors including neon green and sparkly dark blue. The company now offers 23 colors which allows for ever-increasing coloring options for printing with the bioplastic derived from corn. This type of product improvement (and the ensuing news coverage) is already built into the forecasted industry growth. Investors shouldn't take this standard type of product improvement as a reason to buy into a stock.  

Small company, huge valuation
ExOne probably best signifies the purely speculative nature of the industry and its related stocks. The maker of industrial-sized 3-D printers isn't expected to generate $50 million in revenue for 2013, yet its market value approaches $1 billion. Maybe even worse, the company has missed analyst earnings estimates every time it's reported during its first year a public company. In a normal industry, the lack of predictable results would crush a stock, but this doesn't occur in the 3-D printing space.

In the third-quarter of 2013, ExOne only sold eight machines. With only $11.6 million in quarterly revenue, a machine costing almost $1 million each can have a dramatic impact on the top line. The company also provides 3-D printed products and services, but revenue from those segments hasn't even reached a quarterly total of $4 million, and only has about 33% growth. Neither total is suggestive of a stock worth nearly 20 times revenue.

Bottom line
The fever pitch in the 3-D printing sector should have investors heading for the exits. All of the potential in the sector is exciting, but the bottom line is that the growth rate is only going to be roughly 20%-30%. The stock gains continue to overshoot the growth rates of the industry -- investors should beware of paying high multiples for 3-D printing company stocks.

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  • Report this Comment On January 30, 2014, at 8:02 PM, BillFromNY wrote:

    I think that the 3-D printing sector is a model for characterizing companies in an industry as growing at a feverish pace due to "irrational exuberance." The investor is convinced, probably justifiably, that there is a huge upside to a revolutionary new industrial process. And they see the prices of the companies shooting upward and want to get in before they bat an eye and there has been another 15% appreciation. The don't want to be "left behind."

    They are not applying any traditional valuation measurements to the price. The company is worth what they pay for it because a million other investors are willing to pay the same price and more.

    A recent example of this may be the satellite radio industry. The share prices of the un-merged XM and Sirius in the years prior to 2009 went through three and four dollars a share and continued to climb to six or seven. That value was in no way related to the amount of revenue being received or to the cash flow being generated.

    Eventually the piper had to be paid and the shares went from dollars to pennies. After Liberty loaned them $530 million, and Mel began to skillfully execute the game plan, once again the shares climbed from pennies to dollars, this time backed by results and not just buyer enthusiasm.

    I'm not saying the 3-D printing stock holders are going to go through anything as traumatic as Sirius holders. But they will see their paper profits decline or at least stagnate until the revenue and earnings of the sector corporations ramp up enough that they are at least within shouting distance of what the share prices say that they should be. The irrational exuberance era will be over.

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