There's a price war afoot in low-end 3D printers. That may not make Stratasys (NASDAQ:SSYS) a sell, exactly -- but it's no longer a buy.
This, in a nutshell, is what investment banker JP Morgan told us today.
Across the country, 3D printing is taking the industrial sector by storm. At General Electric (NYSE:GE), they began using 3D printers to manufacturer entire jet engine components in 2014. A year later, they 3D-printed an entire jet engine! And yet, among the 3D printing machines familiar to most investors -- the small table-top printers made by Stratasys and its archrival 3D Systems (NYSE:DDD) --competition is fierce and demand is dying.
At UBS this morning, analysts are warning that "demand fell off a year ago and has not recovered." According to our friends at StreetInsider.com, UBS cut its revenue estimate to just $718 million this year -- less than the company collected in 2015 -- and cut its earnings estimate by more than half, to just $0.30 per share.
Now, UBS was already pretty pessimistic on Stratasys stock, having rated it a sell. But to lend force to its words, UBS followed up with a reduction in price target to $16. And seconding that emotion, we now find JP Morgan downgrading Stratasys from outperform to neutral. Reporting on this rating, Bidness, etc. tells us that in addition to weak demand, there's also competitive pressure brewing as Stratasys, 3D Systems, and everybody else all compete to land what few sales remain to be made among cautious consumers.
Like UBS, JP isn't holding out much hope for a rebound in the 3D printing market any time soon, warning of "limited visibility" on sales for at least the next six months. And accordingly. JP Morgan is likewise cutting its price target on Stratasys -- to $19.
All of which sounds like pretty miserable news for Stratasys shareholders. But is it really as bad as that?
Let's go to the tape
Bad news: It's worse. At Motley Fool CAPS, we've been monitoring the performance of both UBS and JP Morgan for nearly a decade now. And according to our data, these two bankers both rank in the top 10% of investors we track, scoring CAPS ratings in excess of 90% apiece. While rated roughly breakeven for the accuracy of their picks, when JP Morgan is right about a stock, its recommendation tends to outperform the S&P by more than five full percentage points. UBS does even better, with recommendations averaging better than 10 percentage points per pick.
Suffice it to say, this does not bode well for Stratasys. And the story only gets worse the closer you look at the numbers.
Unprofitable today, and expected to earn so little next year that its forward P/E is at nearly 54 times earnings, Stratasys is arguably one of the most overvalued stocks in the 3D printing sector -- despite being down 79% over the past 52 weeks! For comparison, 3D Systems, while also unprofitable today, costs "only" 26 times forward earnings.
Adding to the pessimism, according to data from S&P Capital IQ, Stratasys hasn't generated a penny's worth of free cash flow in nearly five years, its last full-year profit having occurred in 2011. In contrast, 3D Systems only turned free cash flow-negative in 2015, having generated unimpressive -- but at least positive -- levels of cash profits for several years running before the 3D printing market fell apart.
A better way to make money
Faced with these realities, what should an investor do if you (a) believe there's a future for 3D printing, but (b) also believe that the valuations in this sector are simply too extreme for safety?
Well, at the risk of circling back to where we started, you might consider investing in a company that's learned how to make good use of 3D printing technologies -- but whose fate isn't necessarily tied to widespread adoption of 3D printing tech by the masses.
General Electric, for example, has shown an aptitude for exploiting 3D in its business. And with a forward P/E ratio of just 16, GE stock looks much cheaper than any of the pure-play 3D printing stocks. GE also pays a mighty dividend worth 3.3% annually -- something we have yet to see Stratasys or 3D Systems try to do.
In a topsy-turvy market, an investor looking to make money from 3D printing can take a lot of comfort from GE's steady dividend. And if owning GE stock offers a way to keep skin in the 3D printing game, too? Well, that's just icing on the 3D-printed cake.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 249 out of more than 75,000 rated members.
The Motley Fool owns shares of General Electric Company and recommends 3D Systems and Stratasys. 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.