Shares of 3D printing companies 3D Systems (DDD) - Get Report and Stratasys (SSYS) - Get Report dropped Friday after JPMorgan turned bearish on the stocks, downgrading them to underweight from neutral on valuation concerns.
Despite its concerns, JPMorgan raised its price price targets for both companies, with 3D Systems going from $14 to $18 per share, and Stratasys going from $18 to $23 per share.
"We do think demand will improve with a post-pandemic recovery, and niche markets are opening up for these companies incrementally, but we expect growth to trend in the 5 - 10% CAGR range moving forward, not high enough to justify an aggressive re-rating, not yet," analyst Paul Coster said.
3D Systems is trading at 55 times JPMorgan's 2022 pro forma EBITDA forecast on a forward enterprise value/EBITDA basis. That's a rich valuation compared to JPMorgan's modest compound annual growth rate forecast.
And Coster even only expects that growth rate if "execution continues to improve" under the company's new CEO Jeffrey Greaves, who was hired last May to replace the retiring Vyomesh Joshi.
Meanwhile Stratasys' growth is expected be in the 10% range, but the "risk-reward tilts unfavorable" at its current valuation. JPMorgan expects Stratasys to underperform the rest of its coverage over the next six to 12 months.
JPMorgan does admit that it could be underestimating the magnitude of the post-pandemic rebound, which would benefit 3D printing companies that rely on the healthcare, auto and aviation end-markets.
Last week, 3D Systems estimated fourth-quarter revenue at $170 million to $176 million, topping analysts’ $140 million estimate. The Rock Hill, South Carolina-based company expects fourth-quarter non-GAAP operating earnings of $11 million to $19 million. On a GAAP basis, operating results are expected to range from a loss of $8.6 million to a profit of $500,000.
The adjusted operating-profit range compares with $5.6 million reported for the year-earlier fourth quarter, and break-even in third-quarter 2020.
“In the summer of 2020, we laid out a four-stage plan to deliver increased value to our customers and shareholders,” 3D CEO Greaves said in a statement.