- Most of the companies in the 3D printing space are delivering strong revenue growth.
- The valuations have improved significantly in the past five months as the stocks in the group went down, although valuations might still be an issue.
- Hewlett-Packard's entry into the 3D printing market may be a catalyst for the stocks in the group, as it will eliminate the uncertainty about what HP will do.
- Looking for clues of a sustainable bottom and a potential rally that can speed up the demand for shares.
The 3D printing group is still trying to recover after a brutal sell-off in the last five months. All the stocks in the group are far from their 52-week highs and will probably not revisit those highs anytime soon. However, the companies in the group are delivering robust growth rates, and the overall situation surrounding the group is getting better. One factor that might contribute to a possible rally in the 3D printing group is the high short interest, which may propel the group higher as they are working on their respective bottoming patterns. Hewlett-Packard's (NYSE:HPQ) entry could be another catalyst for the group as the company finally announces its entry and as the uncertainty goes away.
A look at the growth and execution
The stocks in the 3D printing group are trying to recovery after a brutal sell-off in the previous five months. Most of the companies in the group are executing their growth strategies very well.
- The company raised the full year guidance range by $15 million, while its EPS guidance remained the same. The EPS guidance seems disappointing at first, but it includes the equity offering and the recent acquisitions, so I think that this is good news, since the EPS guidance might have been lowered on the account of dilution and acquisitions.
- 3D Systems management expects flat gross margins in the second half of 2014 and margin expansion in 2015.
- The 3D printing market accounts for just a small amount of the global manufacturing market, which is a $10.5 trillion opportunity. The 3D printing market should grow at an annual rate of 32% from 2013 to 2020, according to the Wohlers Report.
The initial market reaction to the Analyst Day was negative, but as investors digested the facts, the stock turned north. My $70 price target (based on a 2014 P/S ratio of 10, with revenue expectations at the top end of management guidance) implies 30% upside from the current price.
Stratasys (NASDAQ:SSYS) is growing its top line at a healthy pace, while its margins are handling the pressure better than 3D Systems'. It is also the better performer in the consumer segment, and has been more focused than 3D Systems, which made numerous acquisitions and plans to do more in the future. Stratasys has also been active on the acquisition front lately. I have stated in my previous article on Stratasys that I expect some tailwinds in the second half of 2014, because "I believe that management is being conservative with its guidance, given the current level of revenue and their prior expectations for 40:60 revenue linearity for the first and second half of the year. If we come close to this linearity, revenue should be $20 million to $40 million higher than the current guidance." And this still does not account for the recent acquisitions, which should additionally boost the full-year revenue. Based on all of these facts and a slightly lower valuation than 3D Systems, I expect that Stratasys should continue to outperform 3D Systems going forward.
ExOne (NASDAQ:XONE) is failing to deliver the growth on machine delivery delays. The company has missed analyst consensus estimates for both earnings and revenue in all five quarters since going public. While there is no way to know if this practice will continue, investors seemed less disappointed with the results and ExOne's share price turned higher after the initial drop. Unless I see better execution going forward, I remain bearish on ExOne, although it will certainly be positively affected by the potential rally of its peers.
voxeljet (NYSE:VJET) is executing its growth strategy very well, but it remains the most expensive stock in the group. The company delivered two quarters of strong revenue growth on solid machine sales, while its services segment's growth remains capacity-constrained. The company is working to address the issue, and we should see strong services growth in the second half of 2014 as it finishes the relocation process of its facility in Germany. Another contributor to the growth of the services segment will be the 3D printing service center in Canton, Michigan. The company expects to begin deliveries of on-demand printed parts in Q3. Although it is the most expensive stock in the group (see table below), I believe that voxeljet could perform very well in the future, since its growth prospects are the most compelling in the group. If the company continues to execute as well as it did in the first two quarters since going public, and if its services growth accelerates significantly in the second half of 2014, we could see the stock trading higher at the end of the year.
Source: Yahoo Finance
Hewlett-Packard's entry into 3D printing might be a catalyst for a rally of the 3D printing group
While Hewlett-Packard's entry into the 3D printing market has been one of the major fears for 3D printing investors, it has yet to materialize in a big way. And as time passes, I am inclined to think that HP is not such a serious threat as many might be imagining. HP's CEO Meg Whitman said in late May: "This is an acorn that we're planting that will become an oak tree in the future." So, the initial impact on the publicly traded 3D printing companies should be very limited. HP has supposedly addressed the "limitations involved with the quality of substrates used in the process, which affects the durability of finished products." In addition, the company expects to compete on the enterprise side of the business, so 3D Systems and Stratasys should continue to lead on the consumer side.
HP's potential entry into the 3D printing market also bodes well for the long-term growth of the industry, as it shows that the major players are catching on and that 3D printing is not just pure hype without any long-term future. HP's entry could also attract other big players that could look for acquisition candidates, and all of the stocks in the group could become targets, which might positively impact their share prices. HP's entry might also be a positive catalyst for 3D Systems and Stratasys, especially if HP's plans are not a serious threat to them. When HP finally announces the entry into the 3D printing field (the announcement was expected in June, but has been postponed, and should be before the end of fiscal Q4 2014, which ends in October 2014), it might also eliminate the uncertainty which has plagued the 3D printing stocks in the last couple of months, and that might also be a positive factor for the share prices of 3D printing companies.
High short interest is another factor that could contribute to the rally
Another possible catalyst for the rally in 3D printing stocks is the high short interest. 3D Systems' short interest is 32.7%, ExOne's short interest is 34%, and they are the prime candidates for a short squeeze rally. On the other hand, Stratasys' short interest is 13.3% and voxeljet's is 15.2%, and although their numbers are not near the former two, they could still prop up demand as the stocks come out of their consolidations.
Risks to the rally
There are some risks for this rally. The general market environment should remain positive, and the companies should continue to execute their growth strategies according to expectations. Current valuations need to be supported by significant top line growth. If the market as a whole turns south, the rally will certainly not last long, as most of the stocks follow the general market down.
A look at the charts of the stocks in the group reveals that they might be at an inflection point. 3D Systems is trying to stay above its 50-day moving average line; Stratasys, ExOne and voxeljet have just poked their heads above their respective 50-day moving average lines. The bottom in their charts looks to have formed, and we might get a nice summer rally if the general market stays in an uptrend.
The 3D printing industry is on a secular growth path, and all the stocks in the group are expected to benefit from the strong growth trends. 3D Systems and Stratasys are the top two stocks in the group, and their share price movements should have a strong impact on ExOne and voxeljet, in either direction. HP's entry might be a positive development for the industry, and high short interest might help the potential rally of the 3D printing group.