Don’t Buy the Sucker’s Rally in 3D Printing Companies

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Just when shares in 3D printing companies like 3D Systems (DDD), Stratasys (SSYS) and ExOne (XONE) looked like there was no bottom in sight, their stocks reversed trend — but these names are still very much losers on the year and remain speculative bets at best.

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3D printing companies represent an exciting new technology — in its very early stages. That has names like DDD stock, XONE stock and SSYS stock running on momentum, where ever-accelerating revenue growth — and hope and hype — supports the share price more than the bottom line.

Profitability, if it exists at all, can be immaterial, and that’s not necessarily a bad thing. That’s how it goes sometimes with young and promising businesses. Amazon (AMZN), famously, didn’t earn a penny in profit for years — and still doesn’t in some surprising quarters — but it’s been a tremendous stock to own over the long haul.

The problem is that most young companies don’t go on to become Amazon, and that’s where things get dicey for shares in 3D printing companies.

A number of 3D printing companies have gone on hot runs recently, and that’s stoking renewed interest in DDD stock, XONE stock and SSYS stock, the biggest 3D printing companies by market cap.

Heck, in the last month alone, DDD stock is up more than 5%, SSYS stock gained 15% and XONE stock rallied 30%.

Part of the recently renewed euphoria for shares in 3D printing companies apparently was started by a client note from Pacific Crest Securities discussing pilot programs at Amazon and Wal-Mart (WMT) for 3D printed objects.

3D Printing Companies: A Bad Bet for a Late Bull Market

That’s nice, but not much to support an extended run. After all, shares in 3D printing companies are still big losers in 2014, and its not like the headwinds holding them back have disappeared.

Lengthen the time-frame on a stock chart and you’ll see that shares in the big 3D printing companies have been portfolio death in 2014. Here’s the carnage for the year-to-date:

SSYS stock: -17% DDD stock: -39% XONE stock: -41%

As we noted earlier, shares in these 3D printing companies became victims of their own success. 3D printing companies were favorites last year, propelling shares of some of the biggest names to some dizzying heights. SSYS stock rose 128% in 2013. DDD stock gained more than 160%. XONE stock saw its shares rise 68%.

But those kinds of hot runs will stretch the valuation of any stock, and 3D printing companies were no exception. When valuations get stretched to almost 300 times forward earnings (XONE stock today), anything that calls an accelerating growth trajectory into question is going to spark a selloff.

And that’s pretty much where we sit with shares in 3D printing companies. They’re crazy expensive, meaning they have to overdeliver time and time again — at just the wrong time in the market cycle.

This late bull market is rewarding defensive sectors like utilities, not momentum names. That makes the recent upturn in 3D printing companies look more like sucker’s rally than a lasting trend.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.