Is This the Most Overvalued Stock On The Market?

Analysts at Credit Suisse are bearish on the prospects for XONE, as they believe that company has a weaker product offering and too shallow an industry presence. These analysts are more bullish on the outlook for 3D Systems, with a $62 price target that is 15% above current levels. (The neutral rating on Stratasys reflects a lush valuation for that stock.)

Yet these analysts, in a recent comprehensive industry report, failed to take note of some potential red flags that investors should be aware of regarding industry darling 3D Systems.

For starters, the company’s organic growth rate is a lot less impressive than you’d imagine. Since September 2011, DDD has made 16 acquisitions, which is more than the rest of the industry combined. Fully one-third of the company’s organic growth rate in the most recent quarter came from acquisitions, and analysts see organic growth slowing to 15% to 20% next year. (Deals completed thus far in 2013 explain the total projected growth rate of 24% in 2014.)

All of those acquisitions have pumped up goodwill, and 3D Systems carries just $410 million in tangible book value. That’s less than the company has raised in its multiple secondary offerings over the past half-decade, meaning balance sheet value creation has been nil.

Also of concern: 3D Systems’ accounts receivable spiked $18 million in the second quarter to nearly $120 million. That has raised concerns that the company is stuffing the sales channel in order to meet high quarterly sales targets that Wall Street is anticipating. Lastly, a drop in six-month cash flow (from $21 million in 2012 to $12 million in 2013) is disconcerting, especially when stated net income for the first six months of 2013 was $34 million.

Risks to Consider: As an upside risk, both SSYS and DDD have the broadest product offerings in the industry, which makes them viable acquisition candidates to a large manufacturer that wants to enter this space.

Action to Take –> Although all three of these stocks sport very lofty valuations, 3D Systems appears to be the riskiest stock here, due to balance sheet and cash flow concerns. Fully 29% of this stock’s float is held by short sellers, reflecting the mounting concerns around this seemingly impressive growth company.

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