I have been advising investors to sell or short 3D Systems (NYSE:DDD) for over three months now, with my latest recommendation coming on Dec. 30, 2013 when the stock was trading above $92. The stock fell as much as 25% in the next few weeks, giving the shorts a chance to cash in their gains; however, it has regained its upward trajectory, appreciating nearly 20% in the last 15 days.
Many investors see the recent blowup as a buying opportunity, but I think it's a big mistake. 3D Systems is driven by hype and a 25% decline in one day indicates that the smallest bit of negative news can send the stock tumbling. When people finally realize that the company's prospects are not good enough to justify its valuation, or hype, the stock price will fall a great deal. Hence, I'd recommend investors to short 3D Systems. Let's go over the reasons why I think 3D Systems will never justify its valuation.
Acquisitions Will Backfire
Due to its aggressive M&A tactics, 3D Systems had to revise its earnings guidance for the fourth quarter and FY2014 downwards. The company expects 2014 earnings to be in the range of $0.73 to $0.85, well below analysts' estimate of $1.27.
Avi Reichental, 3D Systems' Chief Executive, noted, "We are willing to tolerate earnings reduction and even slight gross profit margin compression during this period to substantially accelerate our growth rate and market share." This quote looks appealing, but what will happen if these acquisitions don't turn out to be as profitable as the company expected? Obviously, shares will plummet and there's a good chance of this happening and here's why.
First, many of 3D Systems' acquisition were done with the consumer segment in mind. The acquisition of The Sugar Labs, Village Plastics, and Gentle Giant were done to boost the company's consumer business. People seem to believe that 3D printers will become an everyday household product. I have already said that I don't believe this will ever happen, but even if it does, there's no guarantee that 3D Systems' (Cube and CubeX) 3-D printers will dominate the consumer market.
Overwhelming positive media attention has overhyped 3D Systems' printers. For instance, the company's CubeX 3D printer was awarded the "2013 Best Emerging Tech Award." But, does this automatically mean 3D Systems' printers are the best? No, it does not!
In fact, CubeX is nowhere near the best thing available in the market. Here's a screenshot of customer reviews of CubeX taken directly from Amazon.com. As you can see, the "best emerging tech" gadget failed to please users as they gave it an average rating of 1.1/5.
The advanced version of the CubeX, called the CubeX Duo, didn't do any better as customers gave it an average rating of 1.2/5.
There are many better products available in the market; however, they don't get much attention, primarily because the hype surrounding 3D Systems is massive. Moreover, the 3D printing market is extremely competitive and spending excessively on M&A instead of R&D wouldn't make much sense if the company is not able to come up with better-quality products. In addition, wealthier companies like Hewlett-Packard (NYSE:HPQ) will also be entering the market pretty soon, posing a new threat to the existing players.
The hype surrounding 3D printing is so huge that it has overshadowed the facts. For instance, consider the case of Boeing. Avi Reichental said, "The company's printers already make about 90 different parts installed in F-18 fighters." This quote made everyone believe that 3D printing has a great future in the aerospace segment, and 3D Systems being a supplier of Boeing will benefit the most. However, it isn't true, as Citron Research recently released a report, debunking this myth. Citron noted:
"RMB Products, a privately held independent company, acquired the spinoff of Boeing's additive manufacturing operations several years ago, and was at one time Boeing's sole supplier of nylon SLS-manufactured parts. Nowadays Boeing has authorized SLS manufactured nylon plastic parts from 5 manufacturers, one of whom is still RMB products.
RMB Products buy 3D Systems' production machines on the secondary market, and modifies them. Using these machines and materials, neither of which are purchased from 3D Systems, they manufacture F-18 parts. So the truth is 3D Systems does not make one dime in revenue from parts on the F-18, not the machines, not the materials, and not engineering or other services. RMB has done no business with 3D Systems in years.
And did we mention that while 3D Systems touts the ability of this technology to 'print in metal', but in reality it does not produce one machine that has that capability."
Yes, it is possible to print a variety of different objects via 3D printing, but it will not revolutionize the manufacturing industry. In the industrial space, the existing traditional manufacturing methods are very cheap, and in almost every industry, cost is the primary driver in selecting manufacturing equipment. The company will succeed in very niche markets targeting dentists, design firms, and architecture firms etc., but not in the mass production market. Thus, I believe 3D Systems will sink considerably when people realize its true potential. Therefore, I think investors should short 3D Systems at present valuations.
3-D printing is still in its nascent stage. Although the technology has evolved over time, it still has a long way to go. If raw materials used in 3-D printing get stronger and more durable with time, it won't be surprising if they find use in mainstream industrial and domestic applications. This is where 3D Systems' various acquisitions will come to its advantage.
The advent of durable concept models, prototypes, and tooling could help make industrial products move into production with the help of 3-D printing. However, as I have said all throughout, it does not make sense to buy 3D Systems on this pretext since the stock is highly overvalued and the company is almost as big as the industry itself in terms of market capitalization. Until and unless there's growth in the prospects of the 3-D printing industry, 3D Systems won't have a bright future.
To bring 3D Systems overvaluation into perspective, consider this. Currently, 3D Systems has a market cap of over $7.8 billion, while the 3-D printing market is expected to be worth $8.4 billion by 2020. So, how can a company be worth more than the entire market (that too in 7 years from now)? It's obvious that 3D Systems is extremely overvalued and is way ahead of its fundamentals and given its prospects, it will never justify its valuations. Hence, I think investors should short 3D Systems.
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.