3D Systems: Why My Price Target Is Now $5.60 A Share

Summary

• This is an unforgiving market for stocks that do not exhibit top-line growth.
• Unfortunately for 3D Systems, growth is not there, and there is evidence that revenue might be lower in the next several quarters.
• This could mean the market marks down its stock to 1X revenue or less, or close to $5.60 a share.

3D Systems (NYSE:DDD) shocked the market on Tuesday reporting a loss of $37.7M and a respective loss of $0.20 EPS for Q3'17. The EPS result was a huge miss by $0.32, and frankly it does not get worse than this.

The company also missed on revenue by about $10M. While on the face of it, $10M is not a lot, it is as a percentage of revenue, when DDD only did $152.9M in revenue.

That not being bad enough, the company withdrew its guidance, citing it has "significant transformational work in solving legacy issues", while at the same time addressing executional issues.

Long-time readers know I always caution on paying too much for growth. Yes, growth is what has driven this market, but not at any cost. And in the case of the entire 3D space, investors unfortunately paid pie-in-the-sky valuations over the years.

DDD PS Ratio (TTM) data by YCharts

Long-time readers also know I place a lot of emphasis on the Price/Sales ratio as a guide for not paying too much. While it's not the only ratio I look at, any stock above 5 (with a few expectations) is a suspect for losses or underperformance.

And as the chart above shows, investors have paid "through the nose" for DDD's growth only to find themselves losing massive amounts of money over the years.

And the only way to protect yourself from stocks like DDD is to refrain from buying them, or at least know what you are buying and be ready to sell at a moment's notice.

Because when a company has no growth in this market, or when a company is reorganizing, then the market really knocks down valuations. In the case of DDD, I think you will be surprised at how low this stock might go in the future.

Please recall that as of my last article on the company, I warned there was no growth in sight. While I thought the company could trade at 2X revenue, a prerequisite for this was at least anemic growth and a minuscule EPS.

However, when we take those two elements out of the picture, then this market can punish a stock more than anyone could imagine.

So the question is how low?

DDD Revenue (TTM) data by YCharts

The above chart does not encompass the latest revenue data; however, the outcome would have been almost the same. What is important to note is that DDD has a current revenue run-rate of about $640M per year.

At the moment, the company is not burning cash, and that's a good thing (for now at least). However, since it's entering some kind of reorganization phase, we have to assume that at some point it might in the future, or we might see write-offs.

Another thing to keep in mind is the outstanding share count.

DDD Shares Outstanding data by YCharts

The company's float has remained steady over the years, so I do not see a problem at this end (for now).

We also have to take into account that the company withdrew its guidance. What exactly does this mean? The company last quarter guided for minuscule revenue growth and even missed that by a good margin. Is there a chance we see revenue lower over the next several quarters?

Printer unit sales increased 8% in Q3, but printer revenue decreased 11%. Is this the start of some kind of price-war in the 3D space? I don't know; however, it's not a good sign. Sure, materials revenue increased 4%, and healthcare revenue rose by 10% for the quarter, but were these enough to offset legacy revenue? The numbers seem to suggest no.

So in retrospect, it might seem that revenue for DDD might go lower over the next several quarters. It also seems that competition from HP (HPQ) that I mentioned in a recent article is in full throttle.

Like I said, when no growth is on the horizon, stocks can trade for 1X revenue irrespective of EPS. However, when we have a company that is also losing revenue - or has a good chance of lower revenue - then valuations get punished even more.

So taking the average yearly revenue of about $640M and dividing that by 113.8M shares, I think DDD can trade as low as $5.60 a share. Please note that if things do not stabilize over the next several quarters, this number might be adjusted further to the downside.

Technical picture

As for DDD, all my technical indicators are bearish, and $6.40 is the first line of defense. But if it does go that low, I think it will go even lower, close to the $5.60 level.

As per other stocks in the space that are in a similar boat:

All technical indicators on Stratasys (SSYS) are also bearish, and I think $14 a share might be an absolute bottom, if it corrects in sympathy with DDD to the levels mentioned above.

As for ExOne (XONE), all indicators are also bearish, but not as bad. If however the space continues to have problems, then there is a chance we might see XONE at the $6 level once more.

Bottom line

Unfortunately this is market that does not spare any stock that does not exhibit top-line growth. You can miss as many times as you want on the bottom-line, but if revenue growth is not there, stocks get punished by a lot.

In the case of DDD, that could mean $5.60 a share, assuming the situation does not get much worse in the coming quarters. Stay tuned...

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in DDD over 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.