Get Out While You Can as the 3D Printing Rally Is Dead

After hitting all-time lows in February, almost all of the 3D printing stocks rallied strongly over the next few weeks. Companies like 3D Systems (DDD) even racked up 200% gains as the stock jumped from $6 to roughly 18%.

When the stocks were rising, I warned investors that the rally won’t last long. There were many reasons why the 3D printing rally was unsustainable. The entire 3D printing sector was witnessing a slowdown in demand and as a result, the Wall Street analysts had set a very low bar for 3D printing.

Most of the companies managed to beat the earnings and revenue estimate for the previous quarter, which is why 3D printing stocks rallied.
The bar was set so low, that even ExOne (XONE), a company that had never beaten analysts’ estimates, managed to surpass the consensus on earnings as well as revenue.

However, normal services resumed in the recent reported quarter. Most of the 3D printing companies missed the analysts’ estimates on either revenue or earnings or both and also provided weak guidance. In addition, HP (HPQ) detailed its first two 3D printers called the Jet Fusion 3D 4200 and 3200. The 3D printing space is already very competitive and the entry of giants like HP should further put downward pressure on the existing companies’ margins.

With the likes of 3D Systems and ExOne already losing money, increasing competition doesn’t bode well for long-term investors. Both 3D Systems and ExOne are my best short ideas from the 3D printing industry as both the stocks are massively overvalued and are still trading as growth stocks.

3D Systems has a forward P/E of 25. Despite the fact that the company’s growth has stalled and its revenue is actually shrinking, investors have priced 3D Systems at the valuation of a growth stock.

As for ExOne, I still don’t know if the company can ever turn profitable. ExOne has consistently lost money since it went public and analysts don’t expect it to turn profitable anytime soon. The company is left with less than $30 million in net cash and given that the company has a profit margin of -56%, I am confident that it will burn through this cash at a fast pace. Hence, ExOne longs should prepare for dilution.

All in all, I think the 3D printing rally is now dead, and investors can still capitalize on it by shorting the overvalued stocks. In my opinion, both 3D Systems and ExOne are the most mispriced stocks in the sector and investors can benefit from the recent rally by shorting both of them.
Published on May 24, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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