Are 3D Printers Too Hot To Handle?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Why am I writing yet again about 3D printing stocks? Because they were rocketing higher until January 28. Then both big names in the business, 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS), sold off on huge volume, with 3D systems down as much as 13% and Stratasys down 8%. It's quite possible you may not have heard of the 3D printing revolution involving printers that use additive technology to print three dimensional products in various materials. But if you follow the market at all, you probably noticed those two names running across the scrawl every day a little bit higher.
Stratospheric Share Appreciation
Stratasys was up 139% over the last year with an equally stratospheric P/E of 102.60 (now at 94.09) and a forward P/E of 45.37. The company has no debt and analysts are absolutely Lady Gaga over it expecting over 25% five year annual EPS growth. They report February 7.
3D Systems was up an astounding 260% over the last year and had a 101.42 P/E (now 89.81) and 43.99 forward P/E. This one is seen as having run too far, too fast as the short interest is now 42.10% and analysts see slightly less growth at a five year EPS growth rate of 20.93%. They do see revenues for 2013 year end coming in up $90 million from 2012 year end revenues of $352.99 million. 3D reports February 25.
Why the drop? Possibly, because 3D systems bought yet another company, Coweb of Paris which makes 3D objects. This is the second buy this year alone with Geomet (see below) after 11 acquisitions last year.
Future So Bright You Gotta Wear Shades?
3D printing is still in early innings just beginning to expand the myriad applications it makes possible. Within a few years home use 3D printers should be widely available. Currently, printing materials are somewhat limited (but the range of materials is ever expanding) and the cheapest machines available are the Cube (3D Systems owned) and the Makerbot Replicator (privately held), around $1300 and $2,200 respectively. Stratasys also makes a desktop printer, the Mojo3D which rents for $185+ per month. Right now these are somewhat of a high end novelty item but in creative hands can turn out pieces of art, fashion, and for entrepreneurial inventors, actual prototypes.
Industrial use is already being explored by aerospace, military, automotive, and manufacturing companies globally. Dentists and othodontists have been using 3D printing technology for years and school systems and colleges nationwide are adopting 3D printers for classroom use.
The most ambitious use will be bioprinting in which a 3D printer uses living cells from a patient to create replacement organs. Already the US Army can create replacement skin on a regular inkjet printer. Physicians are already using 3D printings to create artificial limbs and replacement parts for medical devices. The possibilities for medical uses alone are staggering.
The main barrier to the duopoly position of these two has been in the 3D design side. To that end 3D Systems has definitely agreed to buy Geomet, a 3D authoring solution provider. What does that mean? It's all well and good to have the machine but if you don't have the computer aided design software it might as well be a very expensive paperweight. This purchase is extremely important to keep widening the moat for 3D Systems and is supposed to be immediately accretive upon its closing by Spring 2013.
Stratasys also made a very strategic merger with Objet of Israel at the end of 2012 and had made several acquisitions to keep it competitive with 3D Systems.
Here Comes The However
As much as these had run and with large short interests a serious pullback should have been expected. And if upcoming earnings reports aren't as stellar as expected, not better than expected, there could be more profit taking. If as is possible, these companies are seen as running an acquisitions race, sentiment could turn even nastier.
Yes, it is amazing to see the items created by 3D printing and the variety and artistic ability exhibited at venues like the London 3D Printshow. Fashion shows, musical instruments designed by 3D systems played by a band in real time, and all under the banner, "The internet changed the world in the 1990's. The world is about to change again."
These shows are very cool, the novelty, the glitz with hot violinist Roxy P and reed thin models and so on but then investors have to think hard; will these make real money, what kind of business model is this-razor and blade, an outsourcer of protoyping, etc.
An alternative 3D play with less volatility is Autodesk (NASDAQ: ADSK) which declined less than 1% while the hot names sold off big. Autodesk is the global leader in 2D and 3D software. The company has been in the CAD computer aided design space since 1982. The P/E is much more reasonable at 36.73 with a forward P/E of 18.35. Moreover, RBC Capital Markets upgraded the company to Outperform on January 24 with a new price target of $50 with expected margin expansion for almost 30% upside.
If you are a socially responsible investor who uses employee treatment as a metric it was also named to the Forbes 100 list of Best Companies to Work For . Also, corporate governance risks are low on audit, board, compensation, and shareholder rights. Autodesk hasn't run as much as 3D and Stratasys, only up 8.58% over 52 weeks, in fact underforming the S&P 500. Their short interest is only 1.60%. Both operating margin and return on equity are in the low teens and analysts expect five year EPS growth at 17.15% (yoy).
Autodesk is a hold in several growth funds with T.Rowe Price holding a 6.92% stake.
The Final Takeaway
The runs in Startasys and 3D were enormous and the selloff was to be expected. The industry as a whole is burgeoning and applications for the technology are growing geometrically. Longs shouldn't wring their hands just yet as this is still a game changing business.
If you are new to these names, caution would be advised getting in now as these selloffs might not be over. If you want a name that isn't overbought you might consider Autodesk.
leglamp has no position in any stocks mentioned. The Motley Fool recommends 3D Systems 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. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!