MorningWord 1/15/14: Sagging DDDs – $XONE, $DDD, $SSYS

by Dan January 15, 2014 9:30 am • Commentary

Yesterday’s price action reminded me a whole heck of a lot of what we became used to in 2013, at least from a leadership standpoint.  Large cap tech led the way, high valuation internet roared, solar shined and TSLA blew the doors off.

Noticeable under-performance came from the 3D printing stocks, as the day was book-ended with two earnings disappointments from SSYS and XONE.  This is one sector I just don’t get.  To be fair, to those who were early on the trend in 2013, nice work, but from here on out I suspect it will be a much harder trade.  I would note that the warnings came from two companies of far different size.  Prior to SSYS’s 8% decline yesterday the stock had a market cap of more than $6 billion on 2013 sales expected to be about $480 million.  Last night, much smaller player XONE, with a market cap on last night’s close of $895 million issued a sales warning for the year (basically guiding Q4 down by 15%!) expecting sales at about $41 million.

DDD though is the one to watch and a weaker than expected outlook could be the nail in the coffin for the trade for the time being.  Not saying this space won’t have legs for years to come, since many market participants that I respect think that the technology is revolutionary and may transform manufacturing and distribution of products in ways that were unthinkable a short time ago.  I get all that, but the math does not suggest that the stocks can continue their torrid pace of 2013.

Analysts expect DDD to book sales of $514 million for the year just ended, representing a 45% increase year over year, fairly consistent with its sales growth over the prior 3 years.  Analysts also expect this growth to slow to 30% over the next 2 years, at a time when earnings growth has seen a substantial deceleration from 54% in 2012 to 17% in 2013.  But here is the kicker, for those expecting some sort of M&A in the space, the large players seem almost untouchable.  DDD has a market cap of $9 billion, and analysts don’t expect them to hit the $1 billion sales mark until 2016 (for those interested in a more detailed fundamental analysis, check out our Deep Dive from last month).  What would a larger company, forget a Tech company, but an industrial company, be able to pay for them on a multiple of sales that even on a forward basis seems egregious??

Obviously most have no clue how big a market this could really be, but these are hardware companies and while many of the companies in the space are enjoying gross margins in the 50% plus range, they are likely to come down as competition heats up from existing players and what will certainly be the eventual entrance established hardware players like HPQ.  When a company like HPQ enters a fairly nascent but kind of established market, how will they compete, on price, in an effort to gain market share, and at that point you can say A, B CYA to the sky high valuations in this trader’s humble opinion.

Disclosure, I tried to make a defined risk near term bearish bet last month in DDD (New Trade $DDD: Printer Jam) that is set to expire worthless this Friday.  While the stock is up about 10% above my break-even, I still feel like I have a shot the way the stock has been moving on the news that has been less than stellar.