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Whitney Tilson on the Blowup of 3D Systems (Which He Is Short)

February 05, 2014 | About:
Canadian Value

Hedge fund manager Whitney Tilson (Trades, Portfolio) sent the following to his investors today:

Mark my words: today’s blowup of 3D Systems (DDD) is the beginning of the end for the 3D printing bubble (I’m short five stocks across the sector, the largest of which is DDD).

I’m not the slightest bit inclined to cover anything today and, in fact, today shorted a bit more DDD as it bounced on the entirely predictable rush by analysts to reiterate their buy ratings – “move along, nothing to see here” (more on this below).

3D printing is real, but the stock valuations aren’t. For example, coming into today, DDD was trading at 17x revenues. So now it’s trading at 14x. So what? Even if DDD is accounting properly for its nearly three dozen acquisitions in the past three years – which I highly doubt – it’s maybe worth 3x.

The story is the same for pretty much every company in the sector, which is in a completely obvious and STUUUUUUUUUPID bubble.

It will never happen, but someday I wish the executives of a company like this were injected with truth serum and then wrote the press release. For DDD’s, it would read something like this:

We’re suffering from severe indigestion from our roll-up strategy, which got completely out of control, leaving our company an unmanageable mess. Our investments to drive growth are falling flat – in particular, our big push into the consumer space is a total bust – so we are barely making our top-line guidance and completely blowing our bottom-line guidance. In short, the wheels have completely come off our bus.

But the last thing on earth we’re going to do is admit this. Instead, to delay the inevitable, we’re going to trickle out the bad news and, like the wizard behind the curtain, frantically pull every lever to keep the charade going as long as possible so we can unload as much stock as we can.

Meanwhile, the “analysts”, if injected with truth serum, would write:

Our confidence in this company and management team is pretty well shot – we can see that the wheels have fallen off – but we don’t dare stop pumping the stock because then we’ll lose the company’s investment banking business. Though the stock is down, it’s still absurdly overvalued, so it’s likely that DDD will do a bunch more acquisitions to try to keep the game going – and that spells fat fees for us! So we’re going to keep pounding the table on this tub of crud until the last retail investor has been sucked in and incinerated.

As an example of the contortions analysts are twisting themselves into to remain bullish, consider this note from the Pacific Crest analyst today:

While valuation is always challenging in this space, with DDD being perhaps the most challenging, we still believe 3D Systems is the most innovative company in the space, and we expect it to outgrow the industry. We see upside to $91, or 10x 2015 EV/sales; we are lowering our multiple to 10x from 11x to reflect lower earnings leverage.

Wow, lowering the multiple of next year’s revenues from 11 to 10 – how conservative!

By the way, was it really only last month that we were subjected to this foolishness at CES? 3D Systems Appoints will.i.am as Its Chief Creative Officer. Here’s a video ofwill.i.am with DDD CEO Ari Reichental – it’s high comedy! Talk about a great tell for a stock about to crash – check out this stock chart of DDD over the past year:

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Here’s one more sign of a bubble: last week marked the launch of the first 3D printing-focused mutual fund, the 3D Printing and Technology Fund (TDPIX). I’m not making this up. Here’s the web site, an interview with the manager, and the ad in last weekend’s Barron’s:

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Rating: 3.7/5 (6 votes)

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