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.
No two ways about it, yesterday was not a fun day to own 3D printing stocks. Over the course of six-and-a-half trading hours, shares of 3D printing pioneer Stratasys (NASDAQ:SSYS) fell 6.8%, ExOne (NASDAQ:XONE) was down 2.8%, and German rival Voxeljet AG (NYSE:VJET) decreased 0.6%. The biggest drop of all occurred at 3D Systems (NYSE:DDD), where the stock stumbled 23.7% over the course of the day.
And far from reassuring investors that all is still well, Wall Street added to the panic with a series of downgrades, which is where our story begins.
But first, a word from 3D
Before we get to that story, though, let's review the prologue: 3D Systems' third-quarter 2017 earnings report. On Tuesday evening, before all the selling began, 3D Systems announced its earnings results for fiscal Q3.
Sales for the quarter were down only modestly -- about 2% year over year at $152.9 million. That was still bad enough, however, to miss analyst estimates by about $10 million, because Wall Street had hoped sales would rise. Earningswise, the news was even worse, with 3D reporting a $0.34 loss for the quarter that was nearly twice as bad as last year's $0.19-per-share loss. Here, too, 3D Systems underperformed expectations, for Wall Street had predicted the company would earn a $0.12-per-share pro forma profit -- not a loss.
3D Systems drops a bombshell
Reviewing the results, 3D Systems CEO Vyomesh Joshi deadpanned that the results "did not meet our expectations." And here's the thing: What exactly those expectations will be going forward has now also been thrown into doubt. After reporting Q3's dismal results, you see, Joshi announced that he has decided "to withdraw guidance at this time" -- leaving investors in the dark about when, if ever, 3D Systems' numbers will get better.
Wall Street runs for cover
Cue panic on Wall Street. At last count, no fewer than five separate banking houses had either announced downgrades on 3D Systems stock, cut their price targets, or both. Here's a quick sampling of their reactions (with thanks to StreetInsider.com for the commentary):
- Legal expenses from a Department of Commerce investigation, combined with the need to spend heavily on research and development to keep up with 3D Systems' competitors, "will add further pressures to the balance sheet." (Canaccord Genuity)
- Margins are "declining" and the lack of guidance gives little clarity into the company's future (Merrill Lynch)
- Q3 results "missed expectations," while "customer service and execution issues [are] becoming worse." (Stifel Nicolaus)
- Meanwhile, printing heavyweight HP (NYSE:HPQ) is surging into the market with new "Jet Fusion 3D printers" to challenge 3D Systems' leadership, and may soon introduce a 3D metals printer as well. (Piper Jaffray)
And the real nail in the coffin comes from FBR Capital, which warns that "negative [product] mix and a highly competitive marketplace lower the company's near-term revenue expansion opportunity." So much so, in fact, that FBR has not just downgraded 3D Systems stock to "sell," but also tagged 3D stock with the lowest price target of any of the analysts now chiming in -- just $7 a share. (FBR simultaneously took the next logical step and downgraded 3D Systems archrival Stratasys to "neutral," perhaps on fears that if 3D is forced to cut prices to compete with rivals, it will ignite a price war that will hit Stratasys's sales as well).
How should investors react?
It's at this point that value investors might start hearing echoes of Warren Buffett's famous advice to get "greedy when others are fearful," and begin looking for bargains among free-falling 3D printing stocks. But where are we to find these bargains, exactly?
If you ask me, bargains in this industry still remain few and far between. Even after yesterday's frightful fall, it's hard to call 3D Systems stock a "bargain" with its negative P/E ratio staring you in the face. Then again, Stratasys, ExOne, and Voxeljet stocks are all in much the same position -- no profits, no P/Es. Optimistic analysts think Stratasys, at least, might have profits to report next year, but that expectation could change in a hurry after Stratasys reports its own Q3 results on Nov. 14.
Until then, it seems to me that the only viable, profitable play on 3D printing remaining is that stalwart of the 2-D printing industry, HP. Although hardly a pure play on 3D printing today, HP does boast the admirable virtue of a positive P/E ratio (15.6) -- plus a respectable 2.5% dividend yield and a modest, but at least positive, projected earnings growth rate of 6.3% annually over the next five years.
Long story short, HP may not be the most exciting play on 3D printing, but it may be the safest.