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Why Proto Labs Inc Shares Plunged 25% Last Month

By Markets Fool.com

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Image source: Getty Images.

What happened

Shares of rapid prototyping company Proto Labs Inc (NYSE: PRLB) fell 25.4% in October, according to data provided by S&P Global Market Intelligence, after it reported third-quarter earnings.

So what

Revenue continues to ramp up, rising 15% in the third quarter to $78.2 million, but net income fell 3% to $12 million. But it was guidance -- fourth-quarter revenue of $70 million to $75 million and earnings of $0.36 to $0.44 per share, which would be down from $0.50 a year ago -- that really disappointed investors.

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As the rapid prototyping business has grown, Proto Labs has been a leader and has been far more profitable than most of its 3D printing rivals. So, when investors hear that earnings might be in decline, it's a concern, especially with shares trading at 26 times earnings even after the stock's drop.

Now what

Long term, I think Proto Labs is well positioned in the market, but it's also subject to macroeconomic trends and broader industry conditions that are out of its control. So we may be hitting a point in the cycle where investment in new products is down and revenue for the company will flatten out instead of growing rapidly. That'll adjust investor expectations, but I don't think it changes Proto Labs' leadership position in a highly valued industry for product developers.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Proto Labs. 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.