3D printing stocks have seen a bloodbath this year, with most stocks counting huge losses in the space of just a few months. 3D Systems (NYSE:DDD) has been the hardest hit, with its shares losing as much as 50% at some point this year, and about 30% year-to-date. In comparison, the S&P 500 is up 8% year-to-date. Barron's recently gutted the sector, pointing at 3D Systems as being ''better at manufacturing press releases instead of profits'' and said that its shares are overpriced. Even after the huge selloff, 3D shares are trading at 8.1 times expected 2014 revenue, making them some of the most expensive shares on the S&P 1,500 based on revenue, with Facebook and Visa taking the top two slots.
This has come as an unexpected turnaround from the trend in the past few years. 3D Systems, the biggest name in the sector, saw its shares ramp up 370% in the last two years, and about 120% last year. Stratasys (NASDAQ:SSYS) shares were up about 230% in two years and 92% last year. Newcomers ExOne (NASDAQ:XONE) and VoxelJet A.G. (NYSE:VJET) shares had made 140% and 160% share gains respectively since coming public. Even Hewlett-Packard (NYSE:HPQ) gained 75% last year, despite the company not having a significant exposure to the sector.
The biggest reason why investors have been so excited about the sector is primarily because 3D printing was expected to go mainstream by becoming a consumer item and not just a reserve for industrial uses. But a deeper look into how the sector has been fairing tells a different story altogether. 3D Systems finished last year with a revenue of $513.4 million. For a company valued at $5.8 billion, that's not exactly very inspiring. At the current revenue growth rates, the share price suggests that investors have already priced in a few years of high growth into the shares.
3D Systems has been so popular with investors due to its wild revenue growth; 45% last year, with an expected topline growth of 32%-40% in the current year. But a decent share of 3D Systems' topline growth has been coming from inorganic growth through a raft of acquisitions. The company has become adept at chasing market share, with more than 40 acquisitions made in the past three years. This year's organic growth is expected to come in at 30%, with an overall growth rate 36% sitting squarely at the cross hairs. This implies that 17% of the company's overall growth will come from acquisitions.
VoxelJet sold just three 3D printers worth just $2.5 million in the fourth-quarter of 2013. Its market cap back then was around $540 million. Not too inspiring either.
Growth opportunities for 3D Systems
But that does not in any way mean that 3D printing is a dead sector, far from it. In fact, the Barron's cautionary note might have come a bit early. Not everybody thinks the company's shares are doomed to stay down for the rest of the year. Bobby Burleson and Prabhakar Gowrisankaran of Canaccord Genuity delivered a glowing 3D Systems report on April 4, 2014. Here is an excerpt from the report:
DDD gaining share in metal demand for Phenix machines is strong and we believe the company is able to ship between 15 to 20 machines per quarter exiting the first quarter. Capacity is expanding and we forecast $40 million in revenue for 2014. Importantly, 3D Systems remains overbooked for Phenix and can ship everything it builds. At this run rate, we see 3D Systems exiting 2014 with substantial market share for powder bed fusion systems. While several processes are capable of producing metal parts, we see powder bed fusion (PBF) better positioned for series production in metal when compared to directed energy deposition and binder jetting.
3D Systems recently acquired Medical Modelling in April. The acquisition is expected to bring its expertise in orthopedic implants, custom surgical tools, and surgical models to the table. Canaccord says that it expects the company to support the existing Arcam EBM technology for body implants, and to install its Phenix machines as a complementary technology whenever appropriate.
Canaccord clearly believes 3D Systems' opportunity for growth is big enough, and reaffirmed its $100 price target for 3D Systems' shares based on 11 times expected revenue of $949.5 million for 2015. That's a big 86.8% potential upside to the current share price.
I think the shares are more likely to trade around 9.5 times expected 2015 revenue in a year's time, giving them a price of $86. That's a 60% potential upside.
Other ways to play the sector without risking burning your fingers
Maybe a better way to play the sector would be to invest in companies with only partial exposure to the industry such as Autodesk and Dassault, as Barrons noted. HP may also be a good way to play the sector, since the company plans to announce its 3D printing plans later this year. The company is said to have ironed out manufacturing speed and quality of substrate issues that have been hampering growth in the sector.
HP expects the 3D printing market to grow to a $21 billion-industry by 2021, up from just $2.2 billion in 2012. That translates to a 33% annualized growth.
3D printing is still an immature industry. The sci-fi movie idea that a person can use a 3D printing machine to create things at command might seem otherworldly, but the technology has some very important uses in the real world, especially in medical modeling. Nobody is sure just how big the industry can grow, but it looks quite promising. This makes 3D printing shares decent investments for the long-term investor.
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