At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Who's hot and who's not in 3-D printing stocks
It's been a busy few days for investors in the nascent industry of three-dimensional "printing."
Last week, one of the industry's pioneers, 3D Systems (NYSE: DDD) reported record high revenues and earnings. But because the company missed analysts' revenue estimates ever so slightly, and gave guidance that fell similarly short of expectations, the shares shed 10% of their value post earnings. Analysts, however, stuck fast by the firm, with no downgrades yet sighted.
A few days later, 3D Systems' archrival Stratasys (NASDAQ: SSYS) reported its earnings "crushing" -- in the words of one Fool analyst -- expectations on both the top and bottom lines. In response to that news, Stratasys actually earned itself an upgrade, as Needham & Co. pronounced itself won over to the stock's side: "Since the merger in early December with Objet," noted Needham, Stratasys has grown revenues 23% pro forma, maintained "solid high-teens operating margins," and promised to keep up the momentum with revenue growth of between 20% and 24%. Based on these numbers, Needham says it expects Stratasys to report as much as $1.95 per share in profit this year, then grow that number 29% to $2.52 in 2014.
Introducing some new names
Undisputed earnings success at Stratasys, and strong performance (even if investors aren't recognizing it as such) at 3D Systems is starting to attract competition, though. This week, a little-known penny stock with big-league aspirations, going by the name Massive Dynamics (NASDAQOTH: MSSD) (alluding to the tech conglomerate in Fox's television show Fringe) announced it is entering the 3-D market with a purchase of Hong Kong producer PrintForge 3D Ltd. Profitless, revenue-less, and selling for only $0.64 a share, Massive Dynamics isn't truly a threat to any of the incumbents yet -- but its announcement is just further evidence that 3-D printing is starting to catch investors' imaginations.
A more serious contender, perhaps, is recent IPO ExOne (NASDAQ: XONE), which scored a trio of new buy ratings when analysts began rating it on Monday. FBR Capital extolled ExOne's "ability to print in sand and metal at relatively fast speeds and low costs," and predicted the $26 stock could hit $32 within a year. (Stephens also initiated at $32.) BB&T Capital did both of these analysts one better, though, and initiated the stock with a $34 price target -- a potential 28% gain from today's prices.
Like its fellows, BB&T's buy thesis hinges on the understanding that among incumbent players "plastic-based 3-D printing is more common than metal based printing," giving ExOne a key differentiator in its business. According to BB&T, ExOne's "metal-based printing business should drive accelerating adoption and growth."
Personally, I'm more impressed by hard facts than pretty promises. For that reason, I'm not as enthusiastic as these analysts about "story stocks" like ExOne or Massive Dynamics (cool name notwithstanding). But if truth be told... I'm not all that hot on 3D Systems or Stratasys, either.
Why not? Well, to begin with, at 72 times and 80 times earnings, respectively, I simply don't believe the stocks will earn their way into their valuations any time soon (or any time not soon, either). More importantly, though, the main reason so far that investors have been willing to pay through the nose to own a piece of these companies is because there weren't any other companies to buy in the alternative. 3D Systems. Stratasys. That was basically it for opportunities to invest in 3-D printing. If you wanted a piece of the action, you had to pay up for it.
No more. Now that ExOne and Massive-D have arrived on the scene, there finally are alternatives -- and I expect them, and perhaps more credible competitors to follow, to begin siphoning away the enthusiasm for 3D's and Stratasys' overpriced equities. For now, I see only one direction for these stocks to go, and that direction is down.
Next in line
Who's most likely to present a credible threat to Stratasys and 3D Systems, and at a more reasonable price? The future's uncertain, but if I had to lay odds, I'd keep a close eye on Hewlett-Packard (NYSE: HPQ). The company's no longer allied with Stratasys, true. But it was once, and has presumably gained some understanding of the 3-D printing process from its association with the upstart.
Meanwhile, no one knows printing, and the economics of it, better than H-P. Hurting for growth opportunities as its core "2-D" printing and PC businesses sag, I wouldn't be a bit surprised to see Hewlett-Packard take a second look at the 3-D printing industry as a way to buck up its fortunes.
An acquisition or two in the industry -- maybe targeting popular, privately held MakerBot? -- could add a proverbial 800-pound tech gorilla to the mix here. And with H-P shares currently selling for less than six-times forward earnings, I suspect a move into the industry would win H-P a lot of fans among individual investors, and do more than a little damage to the popularity of stocks like 3D Systems and Stratasys, which up until now, have had this game all to themselves.
Fool contributor Rich Smith has no positions, short or long, in any of the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 314 out of more than 180,000 members.
The Motley Fool recommends 3D Systems and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.