When I last wrote a piece on 3D printing stocks, in November of last year, they were all the rage and being hailed as the next big thing. My point at the time was that, while the technology concerned was potentially truly disruptive, the stocks of the two major players, 3D Systems (DDD) and Stratasys (SSYS) were wildly overpriced. Well, I hate to say “I told you so,” but I told you so.
As momentum stocks have corrected over the last couple of months, both 3D Systems and Stratasys have been hit hard, though, and for those looking to invest in an exciting technology, now may be the time.
It is, and always has been, my contention that markets are prone to overreact; both on the way up and on the way down, and that tendency can translate to great opportunities for investors who can stand the risk of contrarian trades. So, now that the froth has been blown off and we are back to the levels from which the crazy ride up began, the obvious question is “Is this now an overreaction to the downside?”
The most basic measure of value, forward P/E, would indicate that neither stock is close to oversold at this point. DDD is trading at just over 40x next year’s consensus earnings, while SSYS’s valuation represents around 30x analysts’ estimates. When compared to an average forward P/E of under 16 for the S&P 500 this is hardly cheap. When compared to other growth stocks with the potential to disrupt, however, the picture changes a little. Tesla (TSLA), for example, has also been hit hard, but is still trading at a forward P/E around 60.
Dig a little deeper, and the ratio of P/E to growth, the PEG ratio, suggests that, for stocks with the potential for rapid growth increases, both DDD and SSYS are reasonably priced, with PEGs of 2.57 and 1.65 respectively. Again, I know this is not in oversold territory, but, once again, a comparison to TSLA, with a PEG ratio of 3.91, is more applicable than to an average or “normal” level.
Valuations, then, look to be fair, but of course, all of this is based on estimates for the future, so the numbers can only take us so far. What is needed to truly assess the value of DDD and SSYS is what Wall Street calls some “qualitative analysis” and the rest of us call common sense guesswork.
Even as I was being bearish back in November, I did point to one positive about both of these stocks. Buying into them was not a question of taking a gamble on a new technology that one day, somehow would make money for somebody. These are real companies with real revenues and profits. They just happen to be in an industry with enormous potential. That potential can be measured by the interest of big players. In November, I pointed out that Hewlett Packard (HPQ) and Microsoft (MSFT) were interested, now, this morning, rumors abound that Google (GOOG) and Apple (AAPL) are getting involved.
To be honest, this can be seen either way. Obviously, all of the above have enormous resources to throw at the industry and would be dangerous competition for both DDD and SSYS, but their presence indicates that the market really is expanding rapidly. It also prompts the question as to how long it will be before either DDD, SSYS or both are rumored to be buyout targets for one of the big boys. Now that is guesswork in its most blatant form, but, no matter how remote, that possibility alone makes an investment at these levels a tempting proposition.
Buying DDD and SSYS, however, would be more than a bet on the product of a fevered imagination. It would be an investment in two companies who have a solid record of revenue and profit growth in a rapidly growing industry; so rapidly growing, in fact, that even the biggest players in tech are showing an interest in coming late to the game. Neither stock is cheap at these levels, but nor are they anything like as expensive as they were just a few short months ago. This return to the levels from which they launched upward at the end of last year is likely to provide some support, so the downside is likely to be somewhat controlled.
All in all, the risk/reward ratio has shifted. At an area of natural support and with manageable fundamental metrics, both DDD and SSYS look like reasonable buys. There is always the chance that 3D printing will be the next internet, and fundamentally change the way the world does business. There is also the chance that either or both will be swallowed up by Google or Apple as part of either company’s plan for world domination. Neither of these things looks likely right now, but the possibilities are intriguing.
I still believe in the future of 3D printing. What has changed is that now I feel I can put my money where my mouth is.