I have been pounding about the 3-D space for several articles now, even before the sector stared correcting (please consider: 3-D Space: The Accident That Was Waiting To Happen, Just Happened and Is The Long-Term Trend Of 3-D Stocks Now Down?).
My main theme has been that, conservative long term investors should not bother with the 3-D space, because these stocks are priced out of this world, and over the long term, the fundamentals need to catch up to the prices of many of these stocks, and that means that the sector as a whole will underperform long term.
Microsoft (NASDAQ:MSFT) over a decade ago is an example of what I mean. And granted that the Barron's article had a lot to do with slide of the sector since Friday, but in reality, 3-D stocks have been correcting for some time now.
Reading different articles over the past several days, I am glad that the investment community has begun to notice the Price/Sales multiple of these stocks. I have been ranting about this metric for some time now and I thought I was the only one who noticed (in fact many people made me feel crazy). Glad to see many investors and commentators have finally started to notice.
As a reminder, 3D Systems (NYSE:DDD), which is actually the lower priced stock in the space, is trading at a Price/Sales ratio of 13 and a P/E of 75 for 2014. Like I have said before, 3D Systems can fall by over 50% and still be considered expensive. The other 3-D stocks even more so.
And returning to the Barron's article, I think most of the points in the article have also been stressed by myself, but there were a few points that I think are interesting that I was not aware of.
For example, Alexander Eule in that article pointed out that while the 3-D space will indeed change the way we do things, most of the companies in the space (for the most part) are making consumer products and are not really products geared towards large scale manufacturing. General Electric (NYSE:GE) for example is currently using 3-D printers to manufacture key parts for its next-generation jet engines from private firms not listed on any exchange.
I think this is a very valid point. 3-D printing will become a game changer but not in the hands of the consumer. Instead, the game-changer will be on the manufacturing floor. And until this becomes a reality, everything else is just hype, and investors will be overpaying for stocks that will never become the next big thing. Don't get me wrong, I think all the companies in the space will do well, but my beef is what investors are paying for them, not the companies themselves.
And since the sector is now correcting (and if I am right, it will correct a whole lot more), one question that holders of 3-D stocks should ask themselves is this.
Year to date the S&P 500 (NYSEARCA:SPY) is up about 1.5%, but 3D Systems is off by 33%, ExOne (NASDAQ:XONE) 30%, Stratasys (NASDAQ:SSYS) 16%, Voxeljet (NYSE:VJET) 20% and Organovo (NASDAQ:ONVO) by 22% (as of yesterday).
If you ask me, this is not only a sign of sector underperformance, but a very bad omen for the sector. How so?
Well, if the sector has been performing so bad when everything under the sun has been going up, what will happen if and when we see a general market correction?
If you ask me, the sector will crash beyond the wildest imagination of many investors. And the reason for this is simple, the sector is overpriced.
So while I also think that the stocks in the space are a game-changer, I also think that investors are overpaying and over the long run, will probably not benefit their portfolios, even if they buy at current prices.
And testimony to this is the sectors current underperformance, that can get even more ugly if the sector's correction continues, as I think it will.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.