If you get on Twitter, read the Yahoo! message boards, or follow an investment blog, then you might be hearing the loud screams that 3D printing stocks are getting expensive. While this might be true, many investors are valuing these fast-growing and promising companies incorrectly. When valuing such companies, the past is irrelevant, and the future must be your investment guide.
Yes, It May "Now" Be Pricey
If you want to look at the most basic valuing metrics such as P/E ratios and cash-flow then the big three of 3D printing are in fact pricey. The big three publicly traded 3-D printing companies include 3D Systems (DDD), Stratasys (SSYS), and ExOne (XONE). All three companies are growing fast, but are quite different in their operational approach.
3D Systems operates in the consumer space, selling smaller 3D printers with a high level of quantity. Stratasys is diversified, but is known in the enterprise market, with printers that sell in a range from $10,000-$600,000. ExOne is in the expensive industrial space, as its machines sell for at least $1 million. Moreover, all three companies sell 3D printing materials and both 3D Systems and Stratasys have expanded with acquisitions to become more diversified.
Also, all three stocks have been top market performers, as the possibilities for 3D printing are seemingly endless. Just the idea of being able to "print" décor, couches, desks, dental fixtures, maybe even cars, is mind boggling, and has led to large stock gains.
Price/Operating Cash Flow
As you can see, only one of these companies is currently trading with a trailing 12 month profit, and all are expensive relative to sales. But like I said, this isn't how you value fast-growing companies. Instead, you have to look at guidance and potential. Therefore, let's take a look at how each are valued relative to full-year guidance or expectations.
2013 Revenue Guidance
2013 Implied year-over-year Revenue Growth
Forward P/E ratio
The chart above shows company growth and valuation metrics based on future earnings. As you can see, the price/sales ratio of these three companies looks a little better, especially for Stratasys. In particular, Stratasys is growing the fastest, and is priced the cheapest. With all three companies expected to achieve profitability, it is difficult to apply a premium to 3D Systems for its profit. And with Stratasys growing faster than ExOne, it is difficult to award a valuation/sales premium to ExOne. Therefore, with growth and valuation in mind, I must say that Stratasys does look to be the most attractive investment in the space.
Still, at 8.8-18 times sales, these stocks are expensive as a unit. Therefore, investors must determine the "long" term potential of these industry leaders.
What Is The "Long" Term Potential?
3D Systems and Stratasys are unquestioned leaders in the 3D printing space, while ExOne is an up-and-coming competitor. Yet, combined, these three companies will create about $1 billion in 2013.
Looking ahead, Forbes estimates that this market will grow to $3.1 billion by 2016, and then $5.2 billion by 2020. The global research firm McKinsey named 3D printing as one of its 12 disruptive technologies by 2025, saying it could have an economic impact between $20 and $60 billion by 2025, implying its benefit will lead to higher production rates and lower costs for businesses and consumers.
For example, Michigan Technological University estimates the total cost of 20 common household items to range from $312-$1,944. The study concludes that this cost could decline to just $20 for printing supplies with the use of these machines. Thus, the economic impact of widespread 3D printing could be unprecedented.
Apparently, many research firms and economists have high hopes for 3D printing. If in fact this does become a $5 billion industry, then these stocks would be very cheap. If we combine the market caps for the three noted industry leaders, and the presumed $1 billion in 2013 sales, then we find an average price/sales ratio of 9.5. However, if $5.2 billion in revenue is created, the ratio is just 1.8, and has tremendous growth to compliment the valuation. In the market, high-growth is awarded with valuation premiums, and clearly, this is a rapid growing industry, making it an attractive investment space.
Right now, I like Stratasys' growth, valuation, and its diversity in all major industries within 3D printing. However, I am curious to see the success of 3D Systems' new lower priced consumer printers. Stratasys has been quite bullish on consumer demand, guiding for shipments to double from 2012 to 2013. Thus, this year will be very telling in gauging consumer interest.
With this growth in mind, and the mind boggling long-term expectations, I find it hard to call this space "overvalued". Perhaps I am foolish, but I believe that an investment should represent your outlook for a particular company or industry. If you use valuations as a guide, then the outlook for 3D printing is quite high, and if you look throughout the market, you are unlikely to find another industry with this level of growth. Hence, I like 3D printing, and maintain my initial call that Stratasys is the best combination of value and performance within this space.