3D Systems (DDD 2.31%) is one of today's "great shorts," according to Hedge fund guru Whitney Tilson. Why is he shorting 3D Systems? Because he thinks the company is overvalued and that the 3-D printing industry is overhyped. But even if 3D Systems is potentially overvalued, is shorting the stock a smart move? And is it really possible to decide whether or not the nascent growth of 3-D printing is overhyped this early in the industry's development?
Analyzing Tilson's argument
Let's take a look at Tilson's arguments to see if there really is any validity to his points.
Central to his argument was 3D Systems' price. At 17 times sales, it is just too expensive for him to justify. Why? In his opinion, 3-D printing will be a "small, slowly growing market for years to come," according to Barrons author Tiernan Ray.
I wish I could get my hands on Tilson's crystal ball. Because this doesn't look like a slow-growing business today. In 3D Systems' most recent quarter, revenue was up 30% organically from the year-ago quarter. Even more, with just $460 million in trailing-12-month revenue, 3D Systems still accounts for a very small portion of manufacturing; a bet against 3D Systems is really a bet against 3-D printing as a meaningful contributor to manufacturing in the future.
Next, he points to 3D Systems' choice to grow the business through acquisitions as opposed to organic growth. "I don't know how management at 3D Systems has any time to run the business with all the time they're spending doing M&A," Tilson told Ray. Apparently, however, management isn't doing too badly. As I pointed out earlier, the top line saw 30% organic growth in Q3 from the year-ago quarter.
Furthermore, if 3D Systems' opinion that 3-D printing will be a big part of the future is correct, the M&A strategy for growth may be a smart idea. Including M&A, the company grew its top line by 50% from the year-ago quarter. If 3-D printing does turn out to be a major part of manufacturing, then some of the acquisitions could pay handsome dividends over the long haul.
Finally, Tilson's argument seems to be largely centered on the poor outlook for consumer 3-D printers. This is a small segment of 3D Systems' business, at just 10% of its Q3 revenue.
The future of 3-D printing
Reviewing Tilson's arguments, it seems that his bet against 3D Systems is ultimately a bet against 3-D printing as an important part of the future. And based on his comments, I would think he would probably agree with that statement.
But here's my beef with his arguments. A bet against a new and fast-growing technology looks more like a gamble than a wise investment. Sure, 3D Systems' valuation is tough to justify. But that doesn't mean investors should go out of their way to short the company. That's the best part of investing: Sometimes the best action to take is no action. And that's perfectly fine.
While Tilson shorts a fast-growing industry with the help of his crystal ball that says 3-D printing won't continue on its growth trajectory much longer, other investors who think the company is overvalued can simply keep an eye on the stock and wait for a pullback. Both of these parties consider 3D Systems overvalued, but both are approaching risk in a far different manner.
