Are 3-D Printing Stocks Officially "Overvalued?"
Feb 7th 2013 10:44AM
Updated Feb 7th 2013 11:50AM
Although the idea of 3-D printers is over 24 years old, the public only recently got excited about the prospect as the open source maker movement began to unfold. This movement transformed the face of 3-D printing by significantly bringing down the cost of 3-D printers. What used to cost tens of thousands of dollars in equipment can now be purchased for less than $2,000, putting this technology into the reach of more users. As a result, shares of 3D Systems has enjoyed gains of over 200% since its IPO debut in 2011, leading many to proclaim that this small sector has reached "bubble" territory.
Forget the hype. Additive manufacturing is here to stay and will change the face of manufacturing forever. The 3-D printing industry has been growing by an average of 26.4% a year for its entire 24-year history. In 2011, this growth rate has accelerated to 29.4%, indicating that the demand for additive manufacturing is on the rise. By 2015, the 3-D printing industry is expected to become a $3.7 billion dollar industry, and by 2019, it should surpass $6.5 billion. The fact of the matter is that the industry is growing rapidly, which will ultimately translate into increased profits for 3-D printing companies, bringing valuations to a more palatable level.
Put those valuation concerns aside
Based on traditional methodologies, 3-D printing companies are undoubtedly overvalued. Stratasys currently trades with a P/E above 90, giving the classic value investors the cue to avoid this sector like the plague. Motley Fool Co-Founder David Gardner has a different perspective on high valuations. He's not afraid of them, in fact he likes seeing companies that are called "overvalued" by the media. The link will take you to a short five minute video in which David explains the ins and outs of why high P/E's aren't necessarily a bad thing. This approach has allowed David to capitalize on buying "overvalued" companies like Amazon and AOL in the early days, which went on to make life changing returns for his portfolio.
- David likes stocks with strong past price appreciation. This approach is based on William O'Neil's concept that the "winners keep on winning," because over a 10-year period, the best stocks continuously make new highs.
- Investors are skeptical of new technology companies, leading them to call any company with a high P/E or no earnings overvalued. He believes that investors in this camp are only considering the "P" and the "E" and not realizing that there's a whole host of other factors you should be "stacking" on top of earnings. He's talking about things like a rock star CEO, a competitive edge, a history of excellence, outsized business prospects, and anything else that differentiates a company from its peers.
- David believes that "expensive stocks" are interesting companies often with groundbreaking technology, and that often are visionary driven. The negativity surrounding these companies sets them up to climb a wall of worry.
Three "E's" to consider
The main idea behind 3-D printing is that it revolutionizes current manufacturing processes. It allows manufacturers to speed up the process of prototyping, reduce costs, and drive new levels of design complexity that were once impossible. The $22 billion worldwide power tools market is a huge market for 3-D printers to gain share in, helping boost "E" potential for both companies.
There has been increasing hype around the consumer facing side of 3-D printers, where nearly every home in America is going to own a personal 3-D printer. I'm not officially sold on this idea because the utility of why every home needs a 3-D printer today is lacking. The comparison that the 3-D printer is following in the footstep of the classical inkjet printer is unfounded, given the fact it's a much smaller potential market base, even at maximum saturation. Anyone who uses a computer could potentially see the need for an inkjet printer, but 3-D printers are far more specialized to garner the same mass appeal. This detracts from 3D Systems' "E" -- investors betting on this promise will likely be disappointed. Stratasys on the other hand, doesn't operate in the consumer 3-D printer market, neutralizing the negative impact to its "E" potential.
The education space, however, is an area of much greater value for "consumer" 3-D printers. Knowing how to build, operate, and design for a 3-D printer teaches students skills that overlap in fields like electrical engineering, architecture, mechanics, not to mention problem solving and creative thinking. Considering there are over 132,000 K-12 schools in the United States alone, this opportunity could potentially be worth billions in new business. This largely untapped potential greatly boosts the "E" potential of 3-D Systems, but for Stratasys, it's a lost opportunity.
See the value
Traditional stock screens and methodologies completely overlook the living aspects of these businesses. High-growth investors need to consider a greater depth of insights to get a better sense of the value a company offers the world. Based on the three considerations above, 3D Systems comes out as having much greater earnings potential than Stratasys over the long term. Stratasys is concentrating its business in the high-end of the market, potentially leaving more opportunity on the table. Within these seemingly overvalued companies lies real unconventional value for investors.
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The article Are 3-D Printing Stocks Officially "Overvalued?" originally appeared on Fool.com.Fool contributor Steve Heller owns shares of 3D Systems. 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.
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