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Transcendent Technology or a Speculative Frenzy?

December 10, 2013 | About:
In recent reports from MarketsandMarkets and Transparency Market Research, authors claimed that the 3-D printing industry as a whole would be the beneficiary of 23% to 28% CAGR until 2020. That sounds fantastic with no additional information, but my Bayesian instincts kicked in after hearing a few additional pieces of information, the first being that the market in 2012 was an estimated $2.2 billion. Taking the highest estimate of 30% for the next seven years, one would arrive at a cumulative 3-D printing market value of $13.8 billion at the beginning of 2020. Although the market research report estimates a market of roughly $8.41 billion by 2021. Goldman and Credit Suisse took offense and published their reports claiming a total market of $10.8 billion by 2021 and that it is very disruptive technology.



The second piece of information I received was that Hewlett Packard (HPQ) as well as General Electric (GE) were both strategically interested in the technology and thought that it could be a big hit for their future businesses (HP has had 3-D printing in production for at least five years, and the technology was invented in 1984). Last time I checked, the industry behemoths are not the innovators and likely using it as a mass appeal strategy. Both have annual revenues of over $100 billion.

The third point is that Whitney Tilson is short ExOne, 3D Systems and VoxelJet. Whitney Tilson had the following to say about the 3D Systems, the largest short of the bunch.

Ya can’t make this stuff up! From a friend who met with the CEO of DDD (not some penny stock, but an $8 BILLION company): Avi told me during a 1×1 that “his company is 50% technology, 20% innovation and 30% awesomeness.”

What is the appropriate discount rate to apply to “awesomeness”?

Remember that line – it’s a classic; like Chuck Prince’s infamous: “As long as the music is playing, you’ve got to get up and dance.” The only surprise is that Elon Musk didn’t say it.

DDD is one of so many unbelievably great shorts out there right now. I haven’t written it up (yet), but Citron wrote an excellent report in February entitled, What do a Comb, an Egg Cup, and a Justin Bieber Vibrator Have in Common? The stock is a much better short today, as it’s up 26% since then but the fundamentals are deteriorating and the company lowered guidance in its last earnings report. But that hasn’t deterred the bulls, as it trades within a few percent of its all-time high, at 17.2x REVENUES, 64x trailing EBITDA, and 63x next year’s earnings estimates.”

3D Systems had 2012 sales of 353 million or roughly 16% of the 2012 market share, while Stratasys had $215 million in sales or roughly 10% market share. Now taking even the highest estimates of market value in 2021, the highest CAGR estimates, an assumption market share will not erode to larger and deeper pocketed competitors, we reach roughly $3.5 billion market share (in revenues for 2020) for the two companies mentioned above.

3D Systems and Stratasys have market capitalizations of $7.8 billion and $5.74 billion respectively, or a combined total of 13.54 billion. This equates to 4x estimated 2020 sales (using the ridiculous assumption above) or about 4.7x the 2013 market in its entirety. Yes, those two companies have 26% market share and are worth the [Credit Suisse] estimated 2021 market. I am not having a hallucination; the sum of the parts is being valued more than the projected market as a whole.

I was not around during the early 1900s but if I was, I am sure I would have a taste of nostalgia right now. The auto industry had over 1,800 manufactures in the U.S during the early 1900s, with only three remaining today, two of which have been nationalized at least once. Whitney Tilson compared 3D printing to the SegWay and how it was expected to be a breakthrough on the innovation front but was an embarrassing flop.

ExOne (XONE)'s Julian Mitchell said, "We see three key downside risks to consensus sales growth assumptions: (1) uptake of the core technology is liable to be constrained by lack of CAD penetration in Asia (where XONE has higher exposure than peers); (2) there is a need for significant post processing in metals (unlike competing technologies); (3) revenues are highly cyclical, given full exposure to industrial markets and minimal materials 'tail' following a system sale."

Citron was a little more ruthless in their recent report about VoxelJet, calling it a F***ing joke.

Now to compare price to sales, price to earnings, PEG and EV/EBIT between a few 3D printing companies, you be the judge if valuation is fair (N/A means the company is losing money or lack of earnings). I am not recommending shorting any particular company but avoiding the sector as a whole.

Metrics SSYS VJET XONE DDD
Market Cap 5.74 Billion 588 Million 771 Million 7.8 Billion
P/S 11 45.9 22.9 13.7
P/E(TTM) N/A N/A N/A 109.5
PEG N/A N/A N/A 0.6
EV/EBITDA 161 287.62 343 68.7
[/b]Tilson I suspect is short 3D systems for liquidity and volatility reasons instead of VJET or XONE.

[b]
I could not recommend any of these companies to anyone and they should be avoided. When the party stops these inflated balloons will be the first to pop. When two companies (that have 26% market share) are valued at the entire estimated 2021 market you have a problem, a problem of risk seeking versus avoidance and risk that growth does not materialize. When companies are priced beyond perfection it is not my cup of tea. Margin depression, market share loss, lack of industry growth or financing drying up due to cyclicality could cause anyone of these companies to witness a 50% hair cut and still be richly priced.

3D Systems Corporation 10-Y History of P/S Ratio

Dec03Dec04Dec05Dec06Dec07Dec08Dec09Dec10Dec11Dec12
1.182.382.032.052.041.272.264.623.177.26


3D Systems currently has a P/S ratio of 13.7.

We are seeing indications everywhere of a speculative frenzy within the industry. From the proposals of 3D printing ETFs, to short interest as an investment thesis, the sector is littered with folk who can not remember just five and 13 years ago. Ignorance of the past is a root of future imprudence.

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


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