Shares of 3D Systems (DDD, Financial) have rallied over the last few days with the stock now up almost 70% from its all-time lows of $6.
While many factors have contributed to 3D Systems' rally, the upsurge will likely be short lived, and the stock will fall down further for several reasons. As a result, the recent rally should be looked upon as a shorting opportunity, and investors should bet against 3D Systems given the company’s current valuation.
Overvalued
Despite the recent rally, investors need to remember that 3D Systems is losing money at a very fast rate, and the company’s business model is becoming weak with the increasing competition in the 3D printing space. After the recent rally, 3D Systems’ market cap has shot up to almost $1.2 billion. However, given 3D Systems’ inability to generate money, the stock is way overvalued.
3D Systems' operating margin and profit margin stand at -8.6% and -9%. In addition, management has been ineffective in using shareholders’ money properly and has wasted tons of cash on acquisition. As a result, 3D Systems is expected to write down over $500 million in goodwill impairment charges in the upcoming quarter.
For this reason, 3D Systems’ ROA and ROE stand at -2.5% and -4.5%. To make matters worse, 3D Systems' PEG ratio stands at over 13, which signifies that the company’s growth has almost stalled completely. Despite no sales growth, 3D Systems is now trading at over 40x forward earnings. The stock is way overvalued and can be shorted again.
With the company cutting costs and laying off employees, investors can be sure that things are about to get difficult for the company going forward. Despite the recent rally, 3D Systems will struggle to grow sales; considering its high valuation, the stock has about 50% more downside potential from current levels.
Conclusion
3D Systems' recently rally has been fueled by the company’s better-than-expected guidance for the upcoming quarter. However, investors shouldn’t bet on the company’s revival as many factors point toward slowing growth. The facts that 3D Systems is laying off employees and cutting costs suggest that the company anticipates tougher times ahead.
Bearing in mind 3D Systems’ sky-high valuation, the company cannot afford to report less than 20% annual sales growth. However, as per analysts’ estimates and the company’s stance, it is likely that 3D Systems will post negative sales growth next year as well. Investors should use the recent rally to short 3D Systems.
