3-D Printing Stocks: How Do They Stack Up by Valuation As 2014 Begins?

If you're following the 3-D printing stocks, you know this space was on fire in 2013. While all the pure-play 3-D printing stocks had a great year, Arcam's (NASDAQOTH: AMAVF) return of 427% trounced those of its peers, with 3D Systems (DDD +0.43%), Stratasys (SSYS +0.81%), and ExOne (XONE +0.00%) returning 161%, 68%, and 128%, respectively. (Voxeljet (VJET +0.00%), which went public in October, finished the year up 37% from its closing price on its IPO day.)

Arcam's extreme outperformance can largely be attributed to the huge valuation difference that existed between it and the other 3-D printing stocks at the beginning of 2013, in my opinion. First, we'll look at how their valuations mattered in 2013, and then their current valuations, which you might factor into your buying decisions in 2014.

Valuations matter -- especially relative valuations
Granted, absolute valuations for high-growth stocks, such as 3-D printing companies, might matter considerably less than valuations for slower growers. However, they matter quite a bit on a relative (to their peers) basis.

The price action of both Arcam and ExOne in 2013 provided support for the premise that relative valuations matter.

Sweden-based Arcam, which makes 3-D printers for the medical implant and aerospace markets, started the year with a price-to-sales ratio of about 4.5 and a price-to-earnings ratio of about 41. By contrast, the industry's two biggest players, 3D Systems and Stratasys, kicked off 2013 with price-to-sales ratios of about 8.3 and 9.0, respectively. (I'm comparing P/S ratios because Stratasys didn't -- and still doesn't -- have a P/E ratio because of its negative earnings on a GAAP basis.)

Of course, some stocks deserve to be more highly valued than their peers for reasons such as future growth prospects and earnings quality, among others. However, whatever differences that existed between Arcam and the two leading 3-D printing companies certainly didn't justify a 100% differential in P/S ratios. If anything, one would have expected Arcam to sport a higher valuation due to its smaller size, which makes growth on a percentage basis easier than it is for larger companies.

The reason Arcam was relatively cheap was that it was little known among U.S. investors at the start of the year, as it's a small foreign stock that trades over the counter in the U.S. However, once it was "discovered," investors dove in and drove the valuation up to fall roughly in line with its peers.

Meanwhile, investors in ExOne experienced the opposite force at work. They watched the stock zoom from its open near $24, when it went public amid great fanfare in February, to a peak in the low-$70s in late August, before it came crashing down to the low-$40s over the next month. While the stock has steadily recovered, it's still off its all-time high. Insider selling precipitated the correction; however, there's little doubt that the stock's relative over-valuation played a part. The correction left ExOne's valuation more in line with its peers.

How do the 3-D printing players stack up by current valuations?
Here's how the 3-D printers stack up by common valuation measures and a couple other key factors, as of Jan. 3.

Sources: Yahoo! Finance; voxeljet's third-quarter earnings report.
*For nine-month period through Sept. 30.

While 3D Systems and Stratasys started 2013 off with roughly the same P/S ratios (8.3 and 9.0, respectively), investors bid up 3D System's valuation relative to Stratasys' over the last year, so it's now 30% higher. This seems justified, as 3D Systems is currently profitable on a GAAP basis, while Stratasys is not. Additionally, investors viewed 3D Systems' purchase of Phenix Systems in June, which gave the company metals printing capabilities, and its teaming with Google for Project Ara, announced in November, very positively.

Stratasys has historically been profitable. However, its late 2012 merger with Objet negativity affected its profitability. Both the company and analysts expect a return to profitability in 2014.

Voxeljet's valuation is still sky-high. While the company does have some potential competitive advantages -- related to the size, speed, and configuration of its 3-D printers -- it's too soon to tell whether these advantages will be realized and justify its still extremely lofty valuation.

Voxeljet's P/S ratio is two and a half times that of ExOne's, which is its closest peer given their similar market caps, target markets, and business mixes. ExOne focuses solely on the industrial market, while voxeljet has both industrial and commercial printer offerings. Both companies' service center operations account for a considerable portion of their respective overall revenue.

Even if we went under the premise that voxeljet's future looks brighter than ExOne's -- and the other 3-D printing companies, for that matter -- it's hard to image a scenario that would justify its P/S ratio being so much higher than the others in the industry. While I know the stock was bid up on Thursday and Friday because of takeover rumors, it was still considerably more highly valued than its peers before the recent jump.

This doesn't mean voxeljet couldn't grow into its valuation. It does, however, mean that more extreme turbulence could lie ahead, especially if the company's next couple of quarterly earnings reports fall short of investors' expectations.

The Foolish bottom line
While it might not seem like valuations matter when we're in the midst of a go-go market, the party won't continue indefinitely with the same intensity. To position themselves for the best long-term growth, investors should consider relative (to a company's peers) valuations when making their investing decisions in the 3-D printing space.  

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