3D Systems Overvalued, Yelp Attractive And What's Next For The Market

by: David Ristau

In yesterday's article, we will provide readers with a one-stop report on yesterday's markets with our current thesis on the market, pertinent news and analysis, commodities wrap-up, and a look at what is on the schedule for tomorrow. Additionally, our report will provide you with two investing ideas for stocks that were in the news yesterday as we give our analysis on these companies. Yesterday, we were looking at a bullish case for Yelp (NYSE:YELP) and bearish case for 3D Systems (NYSE:DDD).

Oxen Group Market Thesis

Right now, we are looking at a key point in the market. On one side, we got a surprise decision last week from the Federal Reserve that we were not going to be starting to taper. The flow of free money, though, was met by crisis in Washington, DC. Politicians appear to be at gridlock to come up with a solution for the debt crisis. The push and pull of the market has left buyers out of the market for the last several sessions, and the question is with the returns the market has made this year is this crisis going to create a large pullback.

Right now, we are positioning neutral and staying in cash. Here is our current market charts on the SPDR S&P 500 (NYSEARCA:SPY) and SPDR Dow Jones (NYSEARCA:DIA):

(Click to enlarge)

(Click to enlarge)

As we can see, we will still are holding the 20-day and 50-day MAs are the charts, and the SPY is still holding the pre-Fed breakout level. The DIA lost that level yesterday, but we moved off the lows. These charts show bullish moves with a short-term correction. If we lose the 20-day and 50-day MA, we will likely see a retest of 1640-1650 on the S&P and 15000 on the Dow Jones easily.

Pertinent News and Analysis

Yesterday's market was moving mostly on speculation rather than hard data, as there was very little as far as domestic economic data. The keys to the market were the combination of Apple (NASDAQ:AAPL) iPhone sales, Fed speeches, and debt ceiling discussion.

On the positive side, Apple announced that they sold 9M iPhone 5S/5C over the weekend. The company sold out of phones, and they raised their guidance. The numbers beat most expectations that were around 5M - 6M, and the company said they won't have more available until October. As a result, the company said that they expect gross margin at high end of 36% - 37% range as well as $34B - $37B outlook. The news was a bright spot for Apple after the stock saw a hefty correction when the iPhone 5S/5C were originally unveiled two weeks ago. As we have written in other reports, we are very bullish on Apple at these levels, and this news just shows how strong the company is throughout the USA and international markets.

Additionally, the market was very interested in political developments and Fed speeches. Three Fed regional presidents were set to speak yesterday. The market is paying close attention to the Fed after last week, but we speculate that a new decision cannot be made on taper until the December meeting when they do another forecasting. Dallas President Richard Fisher urged his colleagues to taper last week and believes that QE3 is increasing uncertainty. At the same time, Atlanta President Dennis Lockhart commented that the USA was losing some "economic mojo." Lockhart supported the decision as inflation has stayed in check and jobs have not returned. Lockhart, known to take the majority decision, shows that until we see jobs return and/or inflation rise that the Fed will be in no rush to reverse their current trend. Right now, the Fed is providing support for the market. This support is important with the debt ceiling looming. Right now, Democrats appear not interested in debt ceiling limit raises, and they want spending cuts. Speaker of House wants to raise the debt limit and is tying Obamacare defunding onto it. The sides are very far apart, and it appears that it will continue to loom over the market.

Commodities Daily

Commodities were dropping yesterday, as the eventual end to QE is still a conversation here. Citigroup noted that while gold may get a short-term catalyst from the Fed taper delay that it wouldn't last forever. Without the free money, the dollar will jump, and that will hurt the prices of gold (NYSEARCA:GLD). Oil prices (NYSEARCA:USO) were following suit with gold as the prospects for the dollar hurt oil. As the dollar rises, the commodity space falls as the dollar rises against other currencies. On top of this, the Middle East has not been in the headlines. Oil will likely start to move lower as the economy continues to see a sluggish recovery with spikes on Middle East saber rattling. Those spikes are unknown when they can happen, but without them, oil should continue to correct lower.

Buy of the Day

One stock that we like for a bullish case is Yelp. The local review website has been on fire for months up over 200% for the year. A correction is due in the short-term, but yesterday's correction appears to be an opportunity rather than problem. Yelp was dropping hard on Monday on the back of some negative headlines (or appearing negative). The first major hit was news that Yelp and others had agreed to stop posting fake reviews and help stop others from doing it. What was happening is that companies could pay SEO companies to write positive reports about their business to help their rating and reputation grow.

Yelp was not, however, implicated. The company, though, was one site that agreed to help create the solution. Is this a major issue for Yelp - we do not see that it will be. Companies still need Yelp, so they are unlikely to pull from the website as the attention is too positive. Additionally, it gives Yelp's website more credibility. Further, SEO firms are not creating enough traffic that their drop off will hurt Yelp's traffic. The company makes most of their money from local sales where they sell enhanced profiles for businesses where they can respond to reviews, enhance the features, be put on competitor profiles, pushed to the top in searches, and add multimedia.

We see this decision for Yelp as a way to create more credibility for companies, and that is good news for their enhanced profiles. If the company was known for having tons of fake reviews, it would lose traffic and thus lose this major source of revenue.

Looking at YELP stock currently, it trades at a high premium with a 300 future PE and 25x sales. Investors that are buying for the long-term are speculators more than anything. The company, though, has a lot of growth prospects. By 2015, the company is expected to see revenue at $500M. The company is expected to see nearly $350M in revenue this year. It's not a ton of growth for a high-growth name. Price/sales drop to 9, and if the company can grow net margins to even 10% by this time, the company's future PE drops below 80. At this time, the company is definitely expensive. Yet, if you like growth names and speculation stocks, yesterday's drop has created an opportunity.

Unlike DDD, which we are about to discuss, the business is all already there for Yelp, and it's just a matter of size, scale, and margin growth. The sheer volume of reviews and name recognition creates a lot of economic moat for Yelp, and we believe their ability to grow margins and revenue at strong rates is more of a sure thing.

Sell of the Day

One stock that we are concerned about right now is 3D Systems . Another major growth name was in the news yesterday for positive reasons after a Merrill Lynch analyst initiated the company with a Buy and $65 price target. We wanted to set out to figure out how much DDD is really worth, and what kind of growth would need to occur to get to a $65 price level or even yesterday's price level. The first model that we are going to provide seems to be a normal case.

The 3D printing industry is growing about 15% per year. DDD is one of the leaders and can definitely maintain 25-30% growth per year each year for the next several years. Margins may decline, though, if they move into the consumer space as they are expected to do. So, even if growth exceeds 30%, we would expect margin compression somewhat.

For our first model, we assumed the following:

  • Operating income - growth of 25-30% per year, ending with $225M in operating income in 2017, a nearly 300% growth from FY12 we remind you.
  • Taxes - we assume a tax rate increase to 25% as the company loses tax breaks and turns more profits.
  • Depreciation - growth to $50M by 2015 as assets grow.
  • Capex - we kept this low, as the company does not have a lot of capex since a lot of their funding goes to R&D. 25M by 2015 was the rate we used.
  • In a five-year DCF analysis, we came up with a price target of $36. That level would put current PE at 80. So, we believe that the company should operate a rich valuation, as growth is very enticing.

We will provide you with the model that would get us a $65 price target. We would need to see operating income grow to $450M by 2017 in our model. If we keep operating income around the same level and even increase it to 20% of revenue, it would mean that DDD would need to make $2.3B in 2017 - 535% growth over FY12 revenue. While we believe that 3D printers are exciting business, there is heavy competition in this arena and the company would need a very successful consumer uptake by 2017 to even come close to those levels. 3D printing, though, is still not ready for consumers. The printers are currently over $10000, but the low-end printers cannot do what these high-end printers can do.

The company's current major consumer model, the Cube, is interesting. It can print toys, jewelry, mugs, dog tags, game pieces, and much more. Yet, it also costs $1299. The reward-to-price still needs to be more there for consumers to really demand these products.

Here is the price analysis:

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income


















Capital Expendit.






Working Capital






Available Cash Flow






Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for DDD: 10%






PV Factor of WACC






PV of Available Cash Flow






Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for DDD: 4%


Available Cash Flow


Divided by Cap Rate


Residual Value


Multiply by 20167PV Factor


PV of Residual Value


Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows


PV of Residual Value


Cash/Cash Equivalents


Interest Bearing Debt


Equity Value


Step 5.

Divide equity value by shares outstanding:

Equity Value


Shares Outstanding


Price Target


Fortune does a great job of laying out some of these issues, and we recommend DDD investors take note of this. While we believe that the company will get this figured out, can they do it by 2017 with patents expiring and lots of competition? Consumer printers, even if ready, by 2014-2015 cannot provide that type of growth.

Right now, we believe that DDD is looking a bit rich. We like the company and the product, but we need to see consumer products on the market and being sold at good rates to believe that these valuations make sense.

Today's Outlook

For today, we can expect a market moving with more conviction as it receives more pertinent information. We get a nice slate of economic data that includes Case-Shiller Index for July as well as the FHFA Housing Price Index. Case-Shiller is expected to show 12% rise in prices for July, which would be about the same as the June report. Consumer Confidence is also out tomorrow for September, and that report will be very important. Confidence is expected to have dropped to 80.0 from 81.5, and we could see a miss as some issues with Libya on the minds of consumers as well as weaker employment data. The market could use a boost from Confidence to get some confidence back in the market.

If Confidence misses badly, we could lose some key support lines on the market, so be watching for that. Outside of data, we get two more Fed speeches and some information on German business climate with the German IFO for September.

Stay safe out there!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.