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Investors in 3D Systems (NYSE:DDD) continue to be at the right spot, with shares having more than doubled already in 2013. A new research report from analysts at Jefferies is adding to the bull case, with shares approaching fresh all time highs.

Despite the strong momentum and continued growth, I am much more cautious and stay on the sidelines on severe valuation concerns.

Jefferies Is Bullish

Analysts at Jefferies initiated coverage on 3D Systems with a "Buy" rating which is accompanied by a $102 price target. The price target suggests some 27% upside from Monday's closing levels.

Analyst Peter Misek believes that 3D printing will create long term value by revolutionizing mass manufacturing. Near term growth is driven by prototyping, which is expanding from industrial to broader enterprise applications. The consumer opportunity might be interesting, but is overhyped according to Misek.

Despite this, 3D Systems is the most complete player in today's world. The company has the best product breadth, patents and best mix of margin materials and software. While short term growth must come from prototyping, Misek sees a solid future ahead when it addresses mass manufacturing on a mainstream basis.

Valuation

At the end of October, 3D Systems released its third quarter results. The company ended the quarter with $343.4 million in cash and equivalents. Total debt, including capital lease obligations stands at $18.8 million, resulting in a net cash position of $325 million.

Revenues for the first nine months of the year came in at $358.6 million, up 42.2% on the year before. Earnings rose a much more modest 17.3% to $32.9 million on the back of higher effective tax rates. At this pace, annual revenues are seen around $515 million, as GAAP earnings could come in anywhere between $40 and $50 million.

Trading at $80 per share, the market values the company at $8.3 billion, or operating assets around $8.0 billion. This values operating assets of the firm at 15.5 times annual revenues and roughly 200 times earnings.

Given the growth stage and further capital needs, 3D Systems does not pay a dividend at the moment.

Some Historical Perspective

Investors in 3D Systems have seen great returns in recent years amidst the hype, or increased attention about 3D printing. Shares have steadily risen from levels around $10 at the start of 2012 to end the year at $40 per share. Shares more than doubled again in 2013, currently trading at $80 per share after trading as high as $85 per share.

Between 2009 and 2013, 3D Systems is expected to show very solid growth. Earnings are set to more than quadruple to levels just north of half a billion. The company has been solidly profitable as well in recent years, expected to show further growth in net earnings this year.

Investment Thesis

Within investing, the valuation of a company is always the key question. Yet in many established names there are arguments to make for a modest 10-20% over, or undervaluation. Yet for biotechnology firms, or promising firms like 3D Systems at a premium valuation, it is pretty much an all or nothing story for long term investors. As a result, investors in 3D Systems should expect to see quite some volatility on the road.

While the third quarter results were well received, I am a bit more cautious on the guidance. 3D Printing related revenues are very strong. Reported revenue growth for the third quarter came in at 50%, higher than reported revenue growth of 42% for the first nine months of the year.

The full year revenue guidance implies fourth quarter revenues of $129 million at the midpoint of the range, plus or minus $15 million. This represents 27% year-on-year growth, and actually implies a decline in quarterly sales on a sequential basis.

This guidance is a bit disappointing to me, knowing that the company stressed the focus on market share expansion, over earnings. The diversity in terms of positioning allows the company to extend the first mover advantage.

As an example of this commitment is the recent unveiling of the Micro-SLA 3D printer for dental labs and jewelers at an "affordable" price tag of $4,900. Other fresh news includes yet another acquisition, this time of 3D printing company Figulo, which is focused on ceramics. Luckily 3D has access to a very expensive currency, in terms of its stock price to finance these kind of deals.

For now the company focuses on building its leadership position, while operating under the well known business model named after Gilette. It is selling printers, probably a bit cheap to drive sales of consumables which carry solid margins and make future revenues and cash flows more predicable. The "subsidized" hardware sales should boost adoption and the market potential.

Discussions about GAAP or non-GAAP earnings are hardly relevant with the business trading at more than 15 times revenues. What matters is if 3D printing has real growth and 3D Systems will be a market leader in the future. In that case, shares are probably very cheap. In most of the other alternatives, investors will undoubtedly see significant losses. The road to the future is long and many things can happen. While acquisition rumors have already pushed up shares a few times, a $10 billion deal seems quite aggressive, even for the largest established technology names out there. Few boards will be happy to sign of an acquisition of a business generating revenues of $500 million per annum.

Back in February of this year, I last took a look at 3D's prospects. I noted that red flags are emerging as operating performance continues to deteriorate. I concluded to remain on the sidelines on valuation concerns. Yet I noted that this slight bearish stance does not automatically translate into a short thesis, driven by irrational market behavior. This has indeed materialized with shares having doubled in the meantime.

Despite the move and continued growth, I have to reiterate my stance. I remain on the sidelines with a slight bearish stance. While a $100 valuation could indeed happen as suggested by Jefferies, I am sure there are better alternatives out there offering 25% potential with a better risk profile.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.