Are 3D Printing Companies Priced for “Print”-fection?

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As investors & traders are well aware, new manufacturing technology is providing complex new ways to create custom, low-run parts quickly and cheaply. The three dimensional & related printing industry stocks have been white hot in late 2012 and 2013. While its true 3D printers have the potential to reshape the global manufacturing process, the market continues to “print” ever higher valuations on the shares. After watching the parabolic stock moves and ever increasing hype on the sector, let’s examine the market implied valuations of some industry leaders.

 3D Systems Corporation (NYSE: DDD) & Stratasys (NASDAQ: SSYS)

With market capitalizations of $3.7 billion and $3.5 billion respectively, 3D Systems and Stratasys are the largest players in the burgeoning three dimensional printing technology sector. Both stocks have increased significantly in the last two months with Stratasys rising ~30% and 3D Systems rising ~50%.

<img src="/media/images/user_15200/ddd-chart_large.jpg" />

For the sake of simplicity, let’s examine the relationship between the financials of 3D Systems and the company’s fundamentals. While more international than 3D Systems due to its recent merger with Israel’s Objet Ltd, Stratasys is exposed to similar industry risk and is currently pricing roughly in line with 3D Systems. With a market cap of $3,753 million, 3D Systems is trading at 10.9x sales, 43x 2012 EBITDA, and 80x 2012 earnings.

This lofty valuation is based upon the yearly growth rates averaging nearly 60% in 2012 as well as the exceptional industry outlook.  Further, gross profit margins have continued to increase and are now in excess of 50% of sales.

<img src="/media/images/user_15200/ddd-segment-results_large.jpg" />

Given DDD’s increasing growth rates and margins, historical valuation metrics are unlikely to assist our estimate of 3D System’s true value. The below chart is a discounted cash flow analysis of DDD with valuation triangulated to the current share price as of January 22. If DDD grows revenue at 45% a year for the next 5 years with flat gross and EBITDA margins without significantly increase capital expenditures, the current stock valuation is accurate. Note this valuation assumes a 25x P/E multiple in 2014 as well as a 9.0x EV to EBITDA multiple in out years.

<img src="/media/images/user_15200/ddd-current-market-valuation_large.jpg" />

If those assumptions seem high, let’s look at simply reducing the revenue growth rate to 25% per year. If the gross and EBITDA margins remain constant, a compound growth rate of 25% with a P/E multiple of 20x and a 7.0x (normal for manufacturing firms) results in an implied stock value of $32.0.

 

<img src="/media/images/user_15200/ddd-reasonable-valuation_large.jpg" />

 At less than half the current valuation, this reasonable case for DDD implies potential stock market weakness if the growth slips. While I currently have no opinion regarding the ability of DDD to continue its terrific growth rates, the stock is priced for perfection. 

Loosely related to the three dimensional printing leaders is Proto Labs Inc (NYSE: PRLB). While not technically a 3D printer, Proto Labs has developed a CAD software platform which enables the company to efficiently quote and manufacture low-run, quick turn orders for customers. Proto Labs utilizes standard manufacturing processes (largest section is injection molding) but interacts with their customers utilizing their proprietary internet platform. This platform has allowed the company to grow significantly during the last three years while retaining excellent gross margins.

<img src="/media/images/user_15200/proto-labs-segments_large.jpg" />

 As with 3D Systems, Proto Labs’ share price has increased ~50% over the last two months based on positive industry outlook and stock price momentum.

<img src="/media/images/user_15200/prlb-stock-chart_large.jpg" />
 

With a market cap of $1,126 million, Proto Labs is trading at 25.4x 2012 EBITDA and 49x 2012 earnings.

<img src="/media/images/user_15200/prlb-current-metrics_large.jpg" />

The below chart is a discounted cash flow analysis of PRLB with valuation triangulated to the current share price as of January 22. If PRLB grows revenue at 25% a year for the next 5 years with modestly increasing gross and EBITDA margins, the current stock valuation is accurate. Note this valuation assumes a 40x P/E multiple in 2014 as well as a 9.5x terminal EV to EBITDA multiple.

<img src="/media/images/user_15200/prlb-current-valuations_large.jpg" />

 If those assumptions seem high, let’s look at simply reducing the revenue growth rate to 20% per year. If the gross and EBITDA margins remain constant, a compound growth rate of 20% with a P/E multiple of 25x and an 8.0x (high end for manufacturing firms) results in an implied stock value of $28.1.

<img src="/media/images/user_15200/prlb-reasonable-valuation_large.jpg" />

As with 3D Systems, this reasonable case for Proto Labs implies the stock is likely to come under pressure if revenue growth dissipates.

Best of luck trading and investing in these printing companies.  At these levels, the stocks are priced for perfection and a prudent course of action would be to avoid a long term position in these companies for now.


GrizzlyRock has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, Proto Labs, and Stratasys. The Motley Fool owns shares of 3D Systems and Stratasys and has the following options: Short Jan 2014 $55 Calls on 3D Systems and Short Jan 2014 $30 Puts on 3D Systems.

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