Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Thursday was not a pleasant day to own stock in 3D-printer maker 3D Systems (NYSE:DDD). In six and a half hours of frenzied trading yesterday, shares fell 21.3% after the company reported its fiscal Q2 2017 earnings.

But wait! According to one analyst, this is actually good news. 3D Systems stock's "valuation is more fair now" that it has sold off after earnings. So does this mean it's time to buy?

Here are three things you need to know.

3D printer

Image source: Getty Images.

1. The most important thing

Let me not bury the lead here: The most important thing to know about JPMorgan's upgrade of 3D Systems this morning is that the banker does not think now is the time to buy 3D Systems stock.

As reported this morning on StreetInsider.com (requires subscription), JP has removed its underweight rating from 3D, but still only upgraded the stock to neutral (i.e., not to buy) and left its price target intact at $13 per share. With 3D Systems stock closing at $13.39 per share last night, that means the stock still has no room for upside (in JPMorgan's opinion, at least).

2. So why upgrade at all?

And yet, 3D's valuation has certainly improved over what it was before yesterday's sell-off. Prior to 3D's report, JPMorgan thought 3D Systems was worth only $13 per share. (And JP was apparently right about that, as that's almost exactly the level that investors sold 3D stock down to after earnings.)

As the analyst explains, 3D Systems is still losing market share to new start-ups in the 3D printing space. Moreover, there's no indication that JP's worries (previously expressed back when the analyst had downgraded the shares to underweight) about weak end-market demand for 3D printers have abated.

We know this because...

3. What 3D Systems said

In its Q2 earnings release Wednesday evening, 3D Systems reported less than a 1% uptick in sales, and a doubling of its net loss from one year ago. 3D Systems booked only $159.5 million in sales during the quarter, and lost $0.08 per share. Moreover, because some of 3D's sales were "inorganic" -- inherited from the company's purchase of Vertex Global's portfolio of dental materials earlier this year -- it seems likely that organic sales of printers and printing materials by 3D proper actually declined during the quarter.

And most crucially, 3D reported that printer sales for the quarter were down 14%. For a company operating a razor-and-blades business model, this is extremely bad news -- because until you convince a customer to buy the "razor" (the 3D printer) it's very unlikely they'll be interested in buying any "blades" (printing software and materials) anytime soon.

What it means for investors

So what's the upshot for investors here? Surveying the 3D printing universe, which now includes three pure-play names -- Stratasys (NASDAQ: SSYS), ExOne, and 3D itself -- and 2D-printing giant HP besides, plus a whole host of privately owned start-ups, JPMorgan believes that 3D Systems stock will "outperform other names." That said, if sales keep declining, and profits remain nonexistent, 3D could just as easily "outperform" by doing slightly less worse than its competition as by actually doing well itself.

As for the stock's valuation, that's a bit of a mixed bag as well. On the one hand, 3D Systems is now showing negative profits for the past 12 months -- $34.4 million in GAAP losses. On the other hand, 3D has generated positive free cash flow of $24.1 million over the past 12 months, so it is at least generating cash profits. (Archrival Stratasys is in much the same boat. Like 3D, Stratasys lost money over the past 12 months, but generated a sliver of free cash flow -- about $12 million.)

But then again on the third hand, with a market capitalization of $1.5 billion, this all still values 3D Systems shares at more than 63 times free cash flow -- which seems kind of pricey for a company that, according to S&P Global Market Intelligence estimates, is likely to grow profits at just 11% annually over the next five years.

Long story short: 3D Systems stock got a bit cheaper yesterday. But at a valuation that still looks expensive, this stock will need to get even cheaper (or generate more profits) before it deserves a buy rating.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.