A version of this article was published on January 13, 2020, when Mampilly’s ads first called this his “#1 Stock for 2020”, and though the ad is unchanged we’re seeing it a lot again now — most recently, the ads from Banyan Hill now say that this “$10 Stock Gets ‘All In’ Buy Alert on Coronavirus News.”
Which is a little tough to stomach, if only because Mampilly’s boosterism helped drive the stock to $11 or or so back in January when this ad started running, but the latest ads I’m seeing this week make no mention of the fact that the stock just hit 10-year lows during the crash last week, near $5.50 or so. In fact, despite the fact that the latest emails say this is an “all in” buy alert because of “coronavirus news”, the actual ad itself still carries a January 2020 date and is unchanged.
Here’s some of the updated stuff from that email from Jessica Cohn, quoting Mampilly:
“I believe what’s going on in the market is temporary… we’ve done this before in 2003, 2010, 2014 around Ebola, Sars … scares come and go …
“I believe money will come roaring back into the stock market and one of best investments you can make now is a $10 stock ‘immune’ to Coronavirus.”
Of course, if it was completely immune it would still be a $10 stock… but most stocks are not immune to fears of a major recession or the open-ended fears that we don’t really know how long the economy will have to be on “pause,” or how much worse it will get before it gets better. Yes, the market’s gyrating attempts to find the “bottom” will be temporary, eventually we’ll get a better understanding of where the world is going and markets will have a chance to settle and figure out what businesses are worth again… and no, we won’t be able to tell until months or years after when exactly the “bottom” was in.
So no stock is really immune to coronavirus, because stocks trade in a market that is on a wild emotional ride as it tries to figure out what the future will hold — but will the actual business be immune from coronavirus? That’s the question we should all ask ourselves — not when the stock will recover, since that’s pretty much unknowable, but whether a business will keep chugging along, recover from the economic “pause”, and get back to hopefully growing. Find businesses that will survive and thrive a downturn, whether it’s a few months or a year or longer, and then think about what a rational valuation for that stock might be based on the world we’ll be in after the coronavirus outbreak is no longer a major economic event… whenever that might be.
With that in mind, then, what is the stock? Since the ad has not changed I’ve left this next section of the article unchanged as well… and I’ll get back to you at the end with some more thoughts and updates about the actual company.
Paul Mampilly is out with a teaser pitch headlined “America 2.0” that I can only describe as “big patriotic optimism” — he thinks we’re at the point of beginning a new huge wave higher for the US economy as demographics, capital availability, and the “economic velocity” in the economy converge to generate big growth.
Which he thinks will bring the Dow Jones Industrial Average to 50,000 and eventually 100,000, and will help real estate double “in the months to come.”
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He may end up being right, I have no idea [ed. note: so far, he wasn’t — unless “months to come” means “more than three months”], but what piqued my interest was his pitch about a special report that he’ll be providing to new subscribers:
“It reveals my No. 1-rated stock. It’s a little-known company that isn’t just positioned to profit from America 2.0 … it will be essential to building America 2.0.”
So that’s what we’re looking for today… what clues does he drop for us in his “special presentation?”
“… tell us more about this company, and why you think it will soar 1,000%.
“Paul: Sure. It’s a relatively small company based in South Carolina … valued at just $1 billion… But, it’s disrupting a $2.2 trillion industry… manufacturing.
“Manufacturing is the backbone of any economy, really. America is no different.
“Here’s the thing … since Henry Ford introduced the assembly line to the auto industry a hundred years ago … manufacturing has really remained the same. Sure, we’ve had robotics and computers make advancements … but there hasn’t been a disruption.”
I don’t know if I agree that the past 100 years have seen “no disruption” in manufacturing… but we’ll leave him to that opinion. What is this company doing?
“This company is disrupting the auto industry … making better cars, faster. Housing is becoming cheaper. Even the health care industry is seeing massive advancements.
“It already employs 2,000 hardworking Americans who are churning out almost $700 million in annual sales.
“And the stock is about to take off.
“Right now, it’s trading right around $10.
“But I think it could soar to $50 … and then potentially even $100…. within the next few years…. As little as three years.”
And a few other hints:
“BlackRock just bought 514,000 shares of this company.
“Vident just added 404,000 shares.
“And Invesco Advisers just bought 8,000,000 shares.”
So who is this, dear friends? Thinkolator sez it must be 3D Systems (DDD), a stock that, along with its major competitor Stratasys (SSYS) went through a massive hype cycle about 6-7 years ago, when there was investor exuberance about 3D printing taking over the world (and when pretty much every newsletter publisher was teasing one 3D printing stock or another).
Things have been very, very quiet since that hype cycle fizzled out — 3D printing has continued to improve, of course, and has gotten dramatically cheaper (particularly at the low end, where you can now confidently give a clumsy 13-year-old a $100 3D printer that works better than the super-sexy machines of a decade ago), but the enthusiasm has remained dormant for the past four or five years, with both of those companies reporting essentially flat sales.
I haven’t paid a lot of attention to these stocks since they collapsed in 2014 when the promise of “we’re going to 3D print everything and revenue growth will surge!” turned into “um, the slow acquisition-fueled growth we’ve had for 20 years is continuing, actually, and we’re just puttering along… sorry!”
So what’s the story now? Well, the surged in early January 8 — and I would wager that’s largely because of Paul Mampilly and this “#1 Stock for 2020” ad pitch, since his newsletter is low-cost and extremely well-marketed (this is an ad for Profits Unlimited, his $47 letter that’s used as a feeder for his high-end services)… though, to be fair, there was also a little bit of news on the R&D end, and there was also an analyst upgrade at the time (Craig Hallum, saying that “the shares should start to move higher given the narrative change to more of a focus on shareholder value.”)
Which is about as 2020-sounding as anything could possibly be: Moving higher based on a “narrative change.” That’s probably why the stock has been so volatile and failed to really get any traction over the past few years, because no “narrative” has formed about the success (or failure) of their attempt to grow — so perhaps now if they’re going to focus on “shareholder value” the narrative will change?
I wouldn’t bet on it — what will make DDD appealing to me again, if anything does, is revenue growth — the stock has been stuck at this plateau between $600-700 million in annual revenue for five years, and analysts don’t see that changing. I don’t buy the new “narrative” of increasing shareholder value by becoming more efficient — they’re too small for that to be enough to generate excitement. It could certainly help, of course, and if analysts are correct that they can get to 26 cents per share in earnings in 2021 without real revenue growth (by boosting EBITDA margins from the current 5% to 11%), then at $11 the stock is trading at about 40X what will soon be next year’s earnings.
That’s not the current expectation anymore, though, that was back in the world of January — here in March, analysts have downgraded their expectations and they now see about 13 cents as the likely earnings per share number for 2021, with 8% EBITDA margins. The stock is now in the $6.50 neighborhood, so the simple forward valuation has actually gotten less appealing despite the share price drop, DDD is now trading at 50X forward earnings.
Call me a fuddy-duddy, but I don’t think you should trade at 40-50X forward earnings because of a one-time recovery in margins as part of a long-running “turnaround” story, even if those analysts are right. You shouldn’t get a lofty valuation like that without either a rock-solid guarantee (like some utilities and strong dividend payers), unless you have revenue growth showing a clear sign that the business is growing and will continue growing… and currently, that average analyst forecast is that DDD, which had sales of $688 million in 2018, will drop to $627 million when 2019 is complete (they beat that slightly, hitting $629 million when they reported earlier this year), then bounce back up a bit to $650 million in 2020 (now expecting $662 million). That’s not really growth, that’s fluctuating around the same area where they’ve been since 2014.
So that’s my skeptical thinking based just on the financials and the forecasts I’ve seen, and my skepticism hasn’t really changed since I first covered this in January. Feel free to use it to balance Mampilly’s optimism that this will be a leader of the manufacturing revolution and could return 1000% in three years — but, of course, make sure to do your own research and make your own call. This is not about the business, which has been evolving for almost 40 years since DDD’s founder (arguably) invented 3D printing in the early 1980s, it’s about what investors will think about the business in 2020, and I have not studied DDD’s pipeline of products for 2020 or its current strategic plan, and claim no expertise on what investors will think in 2020 (so far, of course, they’re worried that the economy will collapse and trying to guess at when the collapse ends). DDD has had exactly one period of very strong revenue growth in 30+ years as a public company, and that came from 2010-2015 and caused the one real spike the shares have had.
Frankly, I’m still inclined to think that 3D printing, which encompasses lots of different technologies, is a key technology and an important tool… but also that it is a niche product, not a mass market one, and the sector at both the high and low ends is more competitive than you might think (including the “unicorn” Carbon, which is likely to go public in the next year or two, and lots of other small 3D printing startups with slightly different technologies, but also giant HP), and that the 3D printing companies have usually traded not on fundamentals, which have been fairly uniformly weak for SSYS and DDD over the past five years, but on future hopes (new breakthroughs in metal printing, new medical and dental devices). Future hopes change a lot faster than numbers do, so the stocks will probably continue to be quite volatile.
The hope for the future is that 3D printing can eventually become as lucrative as 2D printing — which means that a lot of daydreams of success for DDD or SSYS are based on the idea that a move from using 3D printing to “prototype” products to using 3D printing to actually produce end products will create a vastly larger potential market… and, as importantly, create a larger market for materials and feedstock — which, as with ink for printers, are likely to continue to be high-margin profit centers for all the 3D printer companies.
And that is indeed where DDD is trying to go, they emphasize the early promise of their “production” solutions and services in their Investor Presentation… though I have no idea how this early potential will play out, or what the financials might look like.
Recent chatter has pointed out that the industrial and automotive markets are going to slow down pretty dramatically (or have slowed down, though it hasn’t showed up in the numbers yet), and those are big business areas for DDD (analysts estimate at least 15% of revenue), so capex decisions from those kinds of companies are likely to be mostly on hold and actual business (including orders of parts, services and supplies) will slow down dramatically, which will at least delay revenues for DDD for a couple quarters and maybe meaningfully change the trajectory of their sales for longer if a rebound in demand is slow. Which makes perfect sense. The shares traded up a bit right after the February 26 earnings, which was a mild “beat” of the analyst expectations, but, of course, have been mired in the same sort of downturn as most stocks in the past month.
We probably won’t see an update from DDD until they report their first quarter, which should be interesting — that ought to be in the first week of May. Clearly the stock is not “immune” to coronavirus, and Mampilly’s coronavirus tease is just focused on the fact that the shares have dropped because of the outbreak-related panic — what the long term impact on the company will be of this pause or slowdown or crash will depend on things that are unknowable right now… but even before COVID-19 hit the headlines, growth expectations were pretty tepid for 3D Systems, and while the coronavirus might not hurt the business in the long run, it’s hard for me to conjure up a reason why it would help.
So I’d say we’re still too expensive, I’d start to consider DDD as a “bottoming out” bargain if it got down to $2-3, and it might never get there but that’s OK because I’d only really be interested in a non-growth stock like this if it gets shockingly cheap. Perhaps your opinion will be different, and I’ll leave it to you to make your call — so are you “yeah” or “nay” on DDD? Prefer SSYS or one of the others? Think we’ll have another 3D printing bubble, or that 2020 will mark the beginning of a real recovery in the shares after a long period of weakness? Or is this just another head-fake from businesses that have never done as well as storytellers imagined they could? Let us know what you think with a comment below, I’ve also left the comments from January attached so you can see what your fellow readers were thinking then… and thanks for reading!