- Growth at Stratasys comes at a cost.
- 3D printing stocks have rebounded sharply from the Spring swoon.
- 3D Systems buyout rumors suggest a very aggressive price.
After warning investors that the 3D printing stocks were too expensive back in early January and hoping for a selloff, investors now face a sector that has rebounded too far. Stratasys (NASDAQ:SSYS) plunged below $90 back in May providing an interesting entry point, but do investors really want to own the stock at the current levels back above $115? Investors are now bullish on the sector especially after news that fellow 3D printing stock 3D Systems (NYSE:DDD) had canceled attendance at a conference fueling buyout speculation last week.
After about six months from that original call, investors shouldn't rush back into the stocks with valuations now back to rather expensive levels. Does one really think Hewlett-Packard Co. (NYSE:HPQ) is going to purchase 3D Systems for upwards of $8 billion using a 20% premium to current prices? Based on normal PS or PE multiples, any deal would be difficult to turn accretive even using a high level of cash and low interest debt.
Don't Be Fooled By The Top Line
The biggest issue with the leading 3D printing stocks is that a large part of the top line growth comes from purchases using the high stock price as currency. In the case of the first quarter, Stratasys generated 54% revenue growth and record gross margins that would generally be outstanding numbers. The numbers were aided by the MakerBot purchase that added $21 million in revenue for the quarter. The most important number is that organic sales only grew 33% over the prior year. Due to a nearly 25% increase in diluted shares outstanding and substantially higher operating expenses, net income only grew 17% over the prior year. The earnings per share declined due to the increased shares.
The stock was higher at the start of the year, but the recent rebound leaves it back in a high valuation position similar to all of 2013. Note in the chart below how the stock spent the previous four years prior to 2013 at multiples far below the current level. In the case of 3D Systems, the stock is still trading at a higher level than Stratasys. HP would have a very difficult time paying a premium on the current stock and justifying a multiple even higher than the current one.
The Wohlers Associates annual report on the 3D Printing and Additive Manufacturing industry recently unveiled that growth hit nearly 35% for the last year. The growth rate was the highest in the industry during the 17 years of the report history with the larger growth fueled by the personal 3D printers that helped expand the market.
It is worth noting the expansion that led to higher industry growth rates is what contributed greatly to the lower profits from Stratasys for the first quarter.
On the flip side, Canalys forecasts substantial growth for the industry through 2018 with 3D printer sales surging some 50% a year.
Another report by Markets and Markets forecasts the industry growing to only $8.4 billion by 2020 or roughly half the amount predicted by Canalys. This research report only predicts compound annual growth rates of 23% for the period from 2013 to 2020.
The key takeaway is that the substantial top line growth for the 3D printer stocks continues to distract investors from the fast, but not nearly fast enough organic growth to justify the high valuations. The industry reports forecasts solid growth going forward, but nothing worth paying premium prices for Stratasys especially considering the threats of HP in the industry could compress margins and increase costs for years into the future.
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