With a 55% year-to-date sell-off, Mr. Market hasn't been too kind to 3D Systems (DDD -0.86%) this year. Let's look back at the year to try to determine whether the sell-off was driven by underlying issues in the business and warrants taking action, or if it was based on more shortsighted factors that investors should largely ignore.
What went wrong?
Looking back at the year, there were likely several factors that may have contributed to 3D Systems' big sell-off:
1. Sky-high valuation. 3D Systems' stock entered the year with a ridiculously high valuation, and even after a 55% sell-off, it's still richly valued by conventional measures. It's possible that 3D Systems' valuation relative to its future earnings potential was stretched beyond realistic expectations.
|
Date |
Trailing P/E |
Forward P/E |
Price/Sales |
Market Cap (billions) |
|---|---|---|---|---|
|
Jan. 2 (before 55% sell-off) |
204.7 |
82.6 |
17 |
$9.7 |
|
Oct. 15 (after 55% sell-off) |
110.7 |
41.4 |
6.8 |
$4.5 |
Source: YCharts.
2. Earnings disappointments. Richly valued companies like 3D Systems depend on high earnings growth to help support their valuations, otherwise they can run into trouble and disappoint Wall Street's sometimes higher growth expectations. 3D Systems has already disappointed Wall Street twice this year, and each occurrence raised concerns about its future growth and earnings prospects. While I believe these concerns are shortsighted in nature and likely being blown out of proportion, considering management remains more committed to the long-term success of its business than to short-term earnings, it may have validated some investors who thought that the company's sky-high valuation was unsustainable, at least in the short term.
3. General bearishness. Likely fueled by a combination of its sky-high valuation and missing earnings expectations, 3D Systems has become a heavily shorted stock. As of Sept. 30, 33.6 million of 3D Systems' 109.9 million shares outstanding are actively being sold short, representing about 30.6% of the company's float. While a high short interest can give insight into investor sentiment, it could also have little to do with a business' long-term prospects. Nonetheless, it's currently popular to bet against 3D Systems' future, and this may have contributed to the stock's year-to-date decline.
4. Increased competition. With the 3D-printing industry expected to grow by more than 31% per year through 2020, it's attracting the attention of growth-seeking businesses, including computer giant Hewlett-Packard, which effectively has unlimited resources relative to the 3D-printing industry's current size. Adding to concerns, 3D Systems had key patents recently expire related to its stereolithography and selective laser sintering 3D-printing technologies, which is inviting new competition and could potentially put pricing pressure on 3D Systems' corresponding product lines. All in all, it's certainly possible that investors could've discounted the stock some in anticipation of intensified competition.
5. Poor sector performance. Judging by the 3D-printing sector's year-to-date performance, the sector as a whole may have gotten ahead of itself valuation-wise, and 3D Systems' decline could've been part of the collateral damage.
Putting it all in perspective
Anyone holding 3D Systems shares for longer than two years has been handsomely rewarded and is outperforming the stock market. Granted, it may not be easy to stomach the volatility from one year to the next, but it's important to put this year-to-date sell-off into larger context. Measuring a stock's performance over multiple years could help establish a longer-term investing perspective.
2015 and beyond
While it's impossible to pinpoint the exact combination of factors that has resulted in 3D Systems' 55% year-to-date sell-off, it's definitely possible to think longer-term and divorce yourself from short-term price swings, which may have little to do with long-term earnings prospects or the health of the underlying business. With that in mind, investors should look beyond 3D Systems' short-term price swings and assess how the underlying business is performing.
In my opinion, the factors I've outlined in this article that may have contributed to 3D Systems' year-to-date stock decline seem like they've had very little to do with the actual health of 3D Systems' underlying business and more to do with shorter-term factors. In addition, I don't think the major risks facing 3D Systems have materialized enough to warrant selling shares today. Going forward, 3D Systems investors would likely be well served monitoring how its aggressive strategy is progressing to position itself for long-term earnings growth -- while continuing to ignore the volatile stock price.
