I'm going to attempt something a little odd today, Fools. Even though shares of 3-D printing companies make up 4% of my real-life holdings, and I'm bullish on the technology's future, I'm going to be giving you three reasons to sell your 3-D printing stocks today.
Why am I doing this?
Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we're just deluding ourselves.
It got me to thinking about how I don't write enough about the risks of owning the stocks I own. So although I don't plan on selling my 3-D printing stocks anytime soon, I think it's healthy for me to practice and model this behavior.
Let's go over two of the biggest names in the industry.
| 3D Systems (NYSE: DDD ) | Consumer printers | $4.4 B | $378 M | 68 | 12 |
| Stratasys (NASDAQ: SSYS ) | Industrial printers | $3.5 B | $267 M | 58 | 13 |
Source: Yahoo! Finance, E*Trade, SEC filings.
3D Systems
Source: 3D Systems
This company is home to the founder of 3-D printing, Chuck Hull. Though it has only entered the spotlight over the past few years, 3D Systems has been around for over 30 years. And though the company's recent performance has been spectacular – 40% revenue growth and 84% earnings growth per year for the past three years – there are reasons to be wary.
First and foremost is the company's price. At 68 times earnings and 12 times sales, many could reasonably argue that 3D Systems' stock is priced to perfection. Short sellers are clearly aware of this, as 27% of 3D System's float is being sold short. Any disappointing news could send the stock in a downward spiral.
Then, there is the company's growth-via-acquisition model. Since the beginning of 2011, 3D Systems has acquired 17 different companies. Bulls will argue that this is one way for 3D Systems to accumulate the collective knowledge of 3-D printing under one roof, brand name, and logo. They may be right, but that many acquisitions has to raise eyebrows as to whether money is being well spent and if revenue growth really is as impressive as it seems.
Finally, there's the competition. Though 3D Systems does have its hand in the industrial field, its primary focus is in consumer-facing 3-D printers.
Until recently, only Makerbot's Replicator2 rivaled 3D Systems' Cube printers. But Makerbot didn't have the financial resources to pose a serious ongoing threat to the company.
Source: Makerbot
That is, until rival Stratasys bought Makerbot and can now pump cash into building the brand. That presents a serious change to the consumer landscape that investors need to be aware of.
Stratasys
Speaking of Stratasys, lets tackle this company next. As with 3D Systems, the first red flag for investors should be the price of Stratasys' stock. Again, the company has shown impressive numbers – 43% revenue and 52% earnings growth per year over the last three years. But the company now trades at 58 times earnings when analysts only expect earnings to grow by 31% between 2013 and 2014.
Source: Stratasys
Secondly, while Stratasys has been using acquisitions far less frequently than 3D Systems, it has made two big splashes within the past year. First was the announced merger with Objet, an Israeli company that gave Stratasys access to new technologies as well as new industrial markets. The second was the aforementioned merger with Makerbot.
While investors have generally cheered both of these moves, it remains to be seen if this was money well spent.
If the overall market for 3D printers ends up being smaller than the outsized predictions, both of these companies – and their shareholders – stand to endure disappointing results.
What's a Fool to do?
As things stand now, I'm still a big believer in 3-D printing. I own shares of both Stratasys and 3D Systems, though I like the growth strategy at Stratasys more, and it comprises a larger part of my holdings. I would suggest against going "all in" on either company; instead, allocate reasonable amounts to the field if it interests you.
If you're looking for a 3-D printing company that's currently pulling in way more revenue that 3D Systems and Stratasys combined, I suggest you check out our free report, "3 Stocks to Own for the New Industrial Revolution". I'll give you a hint and tell you that 3D and Stratasys are two of the companies, but to find out what the third is, you'll have to get your copy of the report. Just click here to learn more.
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