Pardon me... but I need to interrupt our regularly scheduled programming today - Part 2 of my piece, entitled
10 Reasons to Be Wary of 3-D Printing Stocks - for an urgent alert.
It appears Wall Street investment bankers want to pull a fast one on lowly retail investors (i.e. - you and me.)
And the con job directly relates to the hype surrounding the 3-D printing industry.
Here's the deal...
I'm Gonna Get You, Sucka... Or Not!
Later today,
ExOne (XONE), a provider of 3-D printers and products to industrial customers, is expected to price its IPO. And trading is set to begin on Thursday.
To say that the company rushed to get the deal done would be an understatement. Management only publicly announced IPO plans on January 8, having
filed confidentially with the SEC on November 13. That's just 28 days ago.
I'm not sure, but that could be a record in terms of the fastest time to market. And it begs the question: Why the hurry, fellas?
A closer look reveals the answer. Simply put, they don't want us paying attention to the company's fundamentals.
Why? Because they stink! (As I'll show you in a moment.)
Instead, they're hoping that we'll all blindly buy into the current hype surrounding the 3-D printing industry, based on last year's high-flying 3-D printing stocks like
3D Systems (DDD) and
Stratasys (SSYS).
It seems to be working, too.
John Fitzgibbon of IPOScoop.com reports, "The deal is said to be well oversubscribed. The Street talk is that the price is to be increased to $16 to $18 - up from $14 to $16 [per share]."
Please don't get suckered in, too.
This IPO doesn't even come close to meeting any of my five hallmarks of a hot IPO. See for yourself...
Why ExOne Bombs My Five-Step IPO Screener
While IPOs offer some of the most explosive profits in the market, it's absolutely critical that you know what you're doing - and know how to separate the contenders from the pretenders.
That's why I created my five-step guide to pinpointing the best IPO stocks. So let's run ExOne through the process...
~Hot IPO Hallmark #1: Age
The older and more established a company is when it goes public, the better the stock tends to perform. But ExOne isn't exactly a seasoned competitor. Although it was officially founded in 2003, the current owners took over in 2007, making it six years old, at best.
And as you'll see in a moment, it's immature for its age, which doesn't bode well for early investors...
~Hot IPO Hallmark #2: Revenue
Age isn't the only way we can measure a company's maturity. We can also use sales. After all, if the company has a marketable product, it should be selling it, right?
Well, research from University of Florida professor, Jay Ritter, shows that companies with more than $50 million in trailing 12-month sales before they go public perform best, rising by about 40% over three years. That compares to only a 5% rise for companies with less than $50 million in sales at the time of their IPOs.
And ExOne is nowhere close to exceeding the sales threshold. Over the last 12 months, it's only booked sales of $19 million. And it's only sitting on a backlog of $3 million.
Those figures are even more pathetic when we consider that the company sold just five printers in the first nine months of 2012. Five!
To put that number in perspective, consider that Stratasys sold 2,509 printers over the same period. In other words, ExOne doesn't even qualify as an "also-ran" in the 3-D printing industry. It was never running in the first place!
~Hot IPO Hallmark #3: Multi-Billion-Dollar Growth Opportunity
An IPO is an investment in the future growth of a company. So at a bare minimum, we should insist on a market opportunity of at least $1 billion. That way, even if a company only garners a modest marketshare of about 20% to 30%, it's still enough to generate significant profits.
As I said in my last column, the
3-D printing industry barely qualifies as a multi-billion-dollar growth opportunity. According to estimates from Wohlers Associates, Inc., 3-D printing only generated $1.7 billion in total sales in 2011.
Now, it would be one thing if ExOne were positioned to capture the lion's share of those sales. However, this clearly isn't the case. Instead, 3D Systems and Stratasys are the ones garnering the most sales.
~Hot IPO Hallmark #4: Profitability
Remember the old stock market adage, "Share prices follow earnings?" Well, most IPOs that fail do so because they lack earnings. And ExOne is nowhere close to hitting paydirt.
In fact, losses are actually increasing. In the nine months to September 30, 2012, the company lost $11 million - up from $5.3 million during the same period a year earlier.
Granted, ExOne is still a very immature opportunity. But even if we give it the benefit of the doubt and evaluate its gross margins to gauge future profit potential, the company still comes up short.
Over the last nine months, the company reported gross profit margins of 37%. That's well below gross margins of 51% and 53% for 3D Systems and Stratasys, respectively.
~Hot IPO Hallmark #5: Valuation
The most important factor for investing in IPOs is valuation. We never want to overpay.
Last week, I noted that 3-D printing stocks already trade at princely valuations. But again, let's give ExOne the benefit of the doubt and say it deserves to command the same valuation as more established firms.
Stratasys trades at a price-to-sales ratio (P/S) of 9.4, whereas 3D Systems trades at a P/S ratio of 11.1. So based on ExOne's $19 million in sales, that works out to a price per share between $13.95 and $16.48.
Remember, underwriters are expected to price the shares between $14 and $16... if not higher. So that means the IPO is coming to market at a rich valuation. Unless you think you can buy high and sell higher, stay away!
One More Major Red Flag
In addition to failing to pass muster with my five IPO-screening criteria, ExOne sports another major undesirable fundamental.
First, the good news: The company does boast a decent competitive advantage, in that it's able to print products in materials that many others can't - including silica sand, ceramics, stainless steel, bronze and glass. It's also working on printing with titanium, tungsten carbide, aluminum and magnesium.
But by the company's own admission, "Much of our key technology isn't protected by patents."
In fact, ExOne has very few patents - five granted and eight pending in the United States, based on data from MDB Capital Group.
That compares to 228 granted and 47 pending for 3D Systems, and 99 granted and 32 pending for Stratasys.
So much for that competitive advantage. Without patent protection, ExOne doesn't really have one. Not one that can stand the test of time, anyway.
Maybe that's why the S-1 filing also includes a "going concern" clause? As in, its financial situation and history of losses raise concerns that the company can even continue to operate.
Bottom line: It takes much more than hype to fuel a stock price over the long term. Sadly, ExOne doesn't have much else going for it.
I'm convinced that if the company attempted this IPO at any other time, it wouldn't have a chance to launch on the market. It would be withdrawn.
But I guess the underwriters are banking on the fact that there's another sucker born every minute. Don't be one of them!
Ahead of the tape,
![]()
Louis Basenese
P.S. We'll return to our regularly scheduled programming in Saturday's issue. Remember, in addition to sharing five more risks facing investors in 3-D printing stocks, I'm also going to reveal an emerging growth trend that
is ripe for investing.
Why should you listen? Because I believe savvy investors could easily double their money in the space over the next year. So stay tuned!
No comments:
Post a Comment