3D Systems (NYSE:DDD) today announced preliminary results and the market did not like them one bit. On the face of it, the company is doing just fine in terms of revenue growth, but on a non-GAAP basis, it fell shy of expectations (to say the least).
3D Systems said that its full year 2013 revenue will be between $513 million to $514 million, within its previous guidance range of $500 million to $530 million, which translates into 30% organic revenue growth for the year and about 50% revenue growth for Q4 of 2013.
The question is, does revenue growth really count, even if a company has little or no profits? Of course it does, but only when you are a normally priced stock.
If your Price/Sales ratio is off the charts -- as is the case with the entire 3-D space -- then as far as I'm concerned, it makes no difference. As a reminder, the Price/Sales ratio of 3D systems is around 16, even after today's fall.
But in the case of 3D Systems, revenue is not the issue, because it came within guidance and within market expectations (whatever that means). Where 3D Systems was way off was in non-GAAP earnings.
Τhe company expects non-GAAP earnings per share for 2013 to be in the range of $0.83 to $0.87, below its previous guidance of $0.93 to $1.03. The market was expecting $0.96 non-GAAP earnings per share.
But where 3D systems really disappointed was in its 2014 guidance. For 2014, the company expects revenue to be in range of $680 million to $720 million (within expectations) but non-GAAP earnings per share to be in the range of $0.73 to $0.85, with market expectations for 2014 of $1.27 (data from yahoo).
Not only is this a big miss, but guess what, it also means the company will not register any non-GAAP EPS growth for two years in a row. For a stock that sells for astronomical multiples and far and above any investment metric I can think of, one would expect more.
And why you ask has the sector been marked down today by the market so much? To begin with, please recall that ExOne also missed expectations a short while ago. So counting 3D Systems today, that's two for two and is a red flag for the sector as a whole.
The second and more important reason, is something I have repeated for the space many times:
The stocks in this sector are so far ahead of the fundamentals, that any deviation from the astronomical expectations the market has of them, can crash many of these stocks, even if revenue growth continues for many years to come.
And that's why 3D Systems is crashing today. Revenue growth will continue, but revenue growth is simply not enough, when you are trading for such high multiples, you need EPS growth as well.
So irrespective if the company and the space continues to achieve 30% revenue growth next year and the year beyond that, there is so much baked into these stocks, that it really does not matter. As a result, any deviation from what the market expects of them can mark them down by a lot.
And that's the reason why investors should shy away from sectors that sell for astronomical multiples, because when they deviate from market expectations, the markdown can be a lot more than what investors can imagine. And like I have said before, the sector can fall by 70% from current levels and still not be considered reasonably priced by my metrics.
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.