- Some stocks in the 3-D space have fallen by 70% and are still falling like a rock.
- The main reason is that they are still expensive compared to most other stocks, even taking into consideration their high growth.
- Using my methodology of what I consider a reasonable price for growth, these stocks still have a ways to go to the downside.
You can't say I haven't warned you about the entire 3-D space. Yesterday, the entire 3-D complex got crushed once more. 3D Systems (NYSE:DDD) closed down 10.8%, ExOne (NASDAQ:XONE) was lower by 7.62%, Stratasys (NASDAQ:SSYS) fell by 11%, and Voxeljet (NYSE:VJET) got crushed by 13.44%, and also fell an additional 4% in after-hours trading.
Even as some of these stocks have fallen by over 2/3rd, they are still falling like a rock. And you know the reason? They have (still) stratospheric valuations.
Please take note that there is a difference between a growth stock at a premium price, and a growth stock at a ridiculously stratospheric price. The difference means a lot to your portfolio if you are a buy and hold investor, because when the market decides to clean house, you can lose your shirt if you are not aware how expensive the stocks you own are.
If you look at the recent headlines of 3-D stocks, you will not find anything that can justify the current correction havoc. And do you know why you don't need to see any negative headlines to justify the current correction? Because when a stock is so ridiculously overvalued -- as are all the stocks in the space -- you don't need news, just a change of sentiment on Wall Street.
Smart investors who do not subscribe to the "greater fool" theory are the first to sell and short these very expensive stocks. And do you know what the difference between this smart bunch of investors and most other people is? They can count.
That's right, they can count. See, when they sit down and look at the balance sheet, sales, market cap, and a whole bunch of other metrics, they come to one conclusion; they should not be long-term buyers of these stocks. Not because the managers are bad people, or because of the business model or even the products, but simply because of the valuation and nothing else.
In the past, I have told you simply not to buy these stocks (or short them outright). Today, we will do something different. Today, I will tell where I would be a buyer, if I decided to venture in the space. And after I tell you, then you can decide what to do for yourself.
Since most of these stocks don't have much in terms of profits, I will once again concentrate on the Price/Sales metric to make my case. I know most investors don't pay much attention to this metric, but it is one of the few metrics that can shed light in cases where we do not have much else to go on besides revenue growth.
So let's make table of several metrics of the 3-D space.
Revenue Growth for 2014 based on guidance
Preferred Price/Sale metric
$8.7 - $17
$5.4 - $11
(Revenue figures for 2014 are based on the average guidance given for each company. For 3D Systems, guidance was $680-$720 million and I used $700 million. ExOne guidance ranged between $55-$60 million and I used $57.5 million, for Stratasys $660-$680 and I used $670, and for Voxeljet I used $24 million, matching the guidance the company gave.)
The two big players in the space are Stratasys and 3D Systems. They are also the two stocks with the most interesting metrics, and the two stocks I would probably buy in the space.
If we assume 3D Systems and Stratasys will continue to grow at the current rate for several more years, then paying a P/E of 25 or a Price/Sales of 7 is not unreasonable. However, these growth figures are likely to come down over the next several years.
Wohlers Associates said that the 3-D space grew by 27.4% CAGR over the past three years (2010-2012), but expects the industry to grow by about 20% CAGR between 2012 and 2021. While this is very impressive growth, it does not justify a Price/Sales ratio of 10, in my book.
In my book, anything above a Price/Sales metric of 3 is borderline expensive (if not an outright bubble). However, I will give the benefit of the doubt to the space and say that I would buy these stocks at around 3-5 sales (3 being for the more conservative investors).
So as far as both 3D Systems and Stratasys, if I were a conservative investor, I would like to buy these growth companies at around 3 times projected 2014 revenue, or in terms of market cap, $2.1 billion for 3D Systems and a $2 billion market cap for Stratasys.
If I were a more aggressive investor, I would pay 5 times projected 2014 revenue, or in terms of market cap, I would be willing to pay $3.5 billion for 3D Systems and $3.3 billion for Stratasys.
As for ExOne and Voxeljet, based on the same methodology, I would pay anywhere from $172-$287 million for ExOne and between $72 and $120 million for Voxeljet, representing a discount of 60%-30% to current market prices respectively.
Just because these are the prices that I would like to pay does not mean that the prices of these stocks will reach these levels. However, there are many fish in the ocean, and I am not forced to buy them. But over the longer term (outside of the folks who simply trade), these are some of the metrics that you have to take into consideration, if you want to make money in the space.