3 Beaten-Up 3D Printing Stocks: Are They Bargains?

By Markets Fool.com

Image source: 3D Systems.

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From their respective all-time highs, 3D printing stocks have taken a beating. 3D Systems (NYSE: DDD) and Stratasys (NASDAQ: SSYS) are down over 80%, while 3D printing service provider Proto Labs (NYSE: PRLB) is down more modestly -- just over 30%:

DDD data by YCharts.

Although investors have soured on 3D printing stocks in recent years, the long-term growth prospects remain attractive. According to Wohlers Report 2014, a leading 3D printing insights report, the 3D printing industry is estimated to generate over $21 billion in worldwide revenue by 2020. If true, this growth would represent a more than fourfold increase from the $5.1 billion in revenue the industry generated in 2015.

In the context of falling 3D printing stocks, this growth potential could spell opportunity. But are these beaten-up 3D printing stocks bargains?

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3D Systems

Based on popular valuation metrics, 3D Systems' stock mostly trades at premium to the S&P 500:

Metric

3D Systems

S&P 500

Premium/Discount to S&P 500

Forward P/E

31.3

18.6

68.4%

P/E to earnings growth (PEG)

4.0

1.8

123.2%

Price/sales

2.7

1.9

40.5%

Price/book value

2.7

2.9

(8.9%)

Data sources: Multpl, State Street Global Advisors, Yahoo! Finance, andThe Wall Street Journal.

Despite its premium valuation, 3D Systems faces a number of challenges that its freshly installed management team is working to overcome. One of the more concerning issues is that the company's printer sales fell 30% year over year in the second quarter -- a steeper decline from the first quarter's 17% fall.

After all, 3D Systems operates a razor-and-blades business model where 3D printer sales fuel the subsequent and repeated sale of higher-margin materials that are consumed as a printer is used. Arguably, if 3D Systems' printer sales continue to remain weak, it could undermine the potential of these future revenue streams. Going forward, 3D Systems hopes to increase demand of its printers by emphasizing manufacturing solutions.

Stratasys

Unlike 3D Systems, Stratasys sports a much more palatable valuation:

Metric

Stratasys

S&P 500

Premium/Discount to S&P 500

Forward P/E

30.7

18.6

65.3%

P/E to earnings growth (PEG)

1.1

1.8

(36.2%)

Price/sales

1.6

1.9

(15.3%)

Price/book value

1.0

2.9

(67.4%)

Data sources: Multpl, State Street Global Advisors, Yahoo! Finance, andThe Wall Street Journal.

Aside from this notable difference in valuation, 3D Systems and Stratasys performed similarly during the second quarter. Both companies experienced falling printer sales, improved material sales, and cut costs in order to narrow their operating losses.

During the second quarter, Stratasys' 3D printer sales fell 19% year over year -- a slightly steeper fall from the 14% decline in the first quarter. Additionally, Stratasys' consumable revenue increased 11% year over year and its operating loss narrowed from $33.5 million to $17.1 million, thanks to operating expenses falling 17%. For perspective, 3D Systems' second-quarter material sales increased 11.5% year over year and its operating expenses fell 20.2%.

Proto Labs

After a 30% fall from its all-time high, Proto Labs' stock remains richly valued:

Metric

Proto Labs

S&P 500

Premium/Discount to S&P 500

Forward P/E

26.4

18.6

42.1%

P/E to earnings growth (PEG)

1.2

1.8

(34.5%)

Price/sales

5.4

1.9

185.8%

Price/book value

4.4

2.9

51.2%

Data sources: Multpl, State Street Global Advisors, Yahoo! Finance, andThe Wall Street Journal.

While Proto Labs' business hasn't been hit with the customer spending slowdown that's affected 3D Systems and Stratasys since early 2015, the company's overall growth and profitability has recently begun to slow.

Specifically, Proto Labs' second-quarter revenue increased 17% year over year to a record $75 million. However, without the benefit of Alphaform AG, a German 3D printing service provider Proto Labs acquired in October, the company's legacy revenue only increased 10% year over year.

What's more, Proto Labs' operating expenses increased by a blistering 35.6% year over year -- far outpacing its revenue growth, which cut into its profitability. Proto Labs' second-quarter net income was essentially flat compared to last year.

A potential pitfall

Between the three, Stratasys appears to be the only 3D printing stock that (mostly) trades at a discount to the overall stock market. However, a fallen stock price often suggests that a business has challenges to overcome. In other words, buying Stratasys could offer investors the greatest margin of safety of the group, but it could also mean that the market views the company as the lowest quality -- with the most problems to overcome.

Ultimately, investors interested in buying a bargain stock should carefully consider the health of the underlying business and its future prospects, all in the context of its current stock price.

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Steve Heller owns shares of 3D Systems and Proto Labs. The Motley Fool owns shares of and recommends Proto Labs. The Motley Fool recommends 3D Systems and Stratasys. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.