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Stretched Valuations Remove Shine From 3D Printers

The market's overvaluing growth prospects for 3D Systems and Stratasys.

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Since mid-December, many 3D printer stocks have been on a tear, with  3D Systems (DDD) up 30% and  Stratasys (SSYS) up by as much as 26% before falling in the last few weeks. Still, both companies are pricing significantly ahead of our fair value estimates. Consensus earnings per share estimates for 2012 and 2013 have drifted higher for both names as investors have been quick to embrace the technology's potential but have also been willing to overlook some of the hurdles to growth. At present valuations, the market assumes an additional 7-9 percentage points of annual growth over our projections for both companies for the next 10 years (market growth assumption for Stratasys is 32%; for 3D Systems, 30%). In our opinion, little has happened during the past month to justify increasing our growth assumptions.

Soaring Valuations Based More on Hope Than Fundamentals
We trace the beginning of the recent runup to a mid-December analyst meeting where General Electric CEO Jeff Immelt singled out additive manufacturing as one of the ways GE is using technology to discover cheaper ways to manufacture goods. While it is encouraging to hear the leader of a major global manufacturer speak to the merits of the technology, our recent discussions with GE's management team as well as other large manufacturers indicate that 3D printing is still several product generations away from being a viable input into select manufacturing processes. Scalability continues to hold the technology back, and Stratasys' management has admitted this is the core focus of the company's current research and development efforts at the moment. That said, Immelt's recognition of the technology adds an air of credibility to manufacturing as one of the three addressable markets; rapid prototyping and personal printing are the other two.

Daniel Holland does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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