Hedge fund persona Whitney Tilson recently called out 3D Systems (DDD 2.36%) as one the "great shorts" in today's market. With shares of 3D Systems trading around 17 times trailing-12-month revenue, there's been no lack of bearish commentaries pointing out that the company's stock has far outpaced its underlying business fundamentals. While I agree that 3D Systems looks expensive today, I don't think price alone necessarily makes an expensive stock a good short candidate.
The next Segway?
Tilson thinks of 3-D printing as the next Segway scooter, in the sense that there's too much excitement surrounding what will ultimately end up being a "slow growth" industry, especially in the consumer segment. In fact, he goes as far as to say that 3D Systems' fundamentals are deteriorating because the company lowered its full-year-earnings guidance. What Tilson didn't acknowledge is that 3D Systems lowered the guidance because it's aggressively pursuing its market opportunity; it has nothing to do with the underlying fundamentals of the 3-D printing industry, or the company itself.
According to Wohlers Associates, the 3-D printing industry is expected grow more than 19% a year compounded through 2021, to become a $10.8 billion industry -- a nearly fivefold increase from the $2.2 billion industry it was in 2012. With growth rates in excess of 19% a year expected for the next eight years, it's not surprising to find 3D Systems more focused on growing market share and competitive positioning than it is with driving earnings growth for investors.
From a business perspective, it makes the most sense to act in the best long-term interest of the underlying business than to focus on delivering short-term results for shareholders. If a business aims to please investors, it could be making trade-offs at the expense of its long-term prospects, which ultimately could negatively affect shareholder performance. Showing more profits today could hurt 3D Systems' competitive positioning tomorrow.
A Foolish response
The biggest issue I take with Tilson's remarks is that they're primarily focused on the consumer side of the 3-D printing industry and completely disregard the industrial segment. While I agree that the prospects of a consumer-oriented 3-D printing revolution are questionable, I think Tilson is missing the forest for the trees here.
Last quarter, consumer-oriented 3-D printers only accounted for 10% of 3D Systems' revenue. That leaves 90% of the money being made in industrial applications -- the driving force of 3D Systems' results. Companies like General Electric and Rolls-Royce are advancing the 3-D printing industry forward with their plans to integrate the technology into their next-generation jet engine manufacturing processes. In other words, the 3-D printing revolution is happening in industrial settings where manufacturers stand to save billions by integrating the technology across their manufacturing supply chains. It took nearly 30 years, but we've finally reached the point where 3-D printing is beginning to become a viable manufacturing alternative to conventional methods.
Best of luck
Interesting businesses often have expensive stocks, and 3D Systems is no different. For the price, you get the most diverse 3-D printing portfolio around and a management team that's been able to successfully integrate 40 acquisitions in the last three years, which together has allowed the company to sustain its competitive positioning and prove its excellence. As an investor, it makes sense to align your time horizon with the growth prospects of the 3-D printing industry at large. In this context, the price you pay today will likely have little do to with the price of 3D Systems a decade from now.
At the end of the day, do you really want to bet against a company that has ambitions to completely revolutionize the way the world manufactures? No matter how expensive, going short on a great company isn't always a good investment strategy.
