John Maynard Keynes famously said that “The market can remain irrational longer than you can stay solvent.” 

Short sellers are also aware of that painful axiom, and many of them lost money in 2013 betting against some of the market’s most popular stocks. And perhaps no single stock defied the logic and reason of short sellers as much as 3D Systems (NYSE: DDD).

Back in September, I took note of emerging concerns about the health of this company’s financial statements and suggested that aggressive accounting would be this stock’s undoing. Still, shares of this and other 3-D printers rose ever higher, and 3D Systems was valued at roughly 125 times trailing earnings. That’s what happens when a stock surges 4,000% in five years.

#-ad_banner-#​Of course, when momentum investors lose interest, stocks such as 3D Systems can’t fall back on any sort of intrinsic value, and a nearly 50% plunge thus far in 2014 has been equally sobering.

The question now is: Should you buy it?

The short answer: More boulders may lie ahead, and you should wait for an even better entry price.

Organic Vs. Inorganic Growth
3D Systems has been dogged by its growth-though-acquisition strategy, in large part because it’s unclear if all of the deals have generated real returns. Those concerns have not gone away just yet. A series of deals completed in 2013 are expected to boost sales 35% this year (to around $700 million), though earnings per share (EPS) will be flat.

Management has always contended that the deals help broaden the company’s platform of products, but in this business, the goal is to be the best-of-breed vendor, which can command better margins. You always want to see strong growth accompanied by flat or rising profit margins. In fact, DDD’s operating margins are expected to fall from 23% in 2013 to 19% this year, according to Pacific Crest Securities.

These analysts say investors should give the company a pass in terms of margins right now. They suspect that investors will soon start focusing again on the fact that sales are growing in excess of 30%, which they see as the larger story, adding that “we see earnings leverage as a secondary priority as 3D Systems attempts to drive higher printer adoption through innovation, establishing share and brand.”

And these analysts do think that earnings growth will eventually follow suit. Per share profits, for example, are expected to rise more than 50% next year, to around $1.25 a share. The 2015 price-to-earnings (P/E) ratio of 40 still seems rich, but it’s easier to tolerate than the double-digit multiple this stock used to fetch.

	Copyright 3D Systems
	While shares of 3D Systems are up close 4,000% in five years, the stock is down nearly 50% this year.

Pacific Crest’s analysts figure shares will trade up to $65, or 30% above current levels, citing a target 2015 enterprise value/sales multiple of 7.2. And that creates a problem.

We’re in a market environment where high multiples are being slashed, and if the market pulls back further, nobody will be thinking about the merits of a multiple of 7 times 2015 sales.

Bobby Burleson, who follows the industry at Cannacord, sees several catalysts for the stock in coming quarters, including “positive new product ramps, margin expansion, and earnings upside.” His $75 price target (representing 50% upside) is based on a similarly rich 8 times sales multiple on his 2015 forecasts.

However, these analysts are likely mistaken in assuming that the market is ready to reward 3-D printing stocks with very high multiples based on short-term sales forecasts.

That’s because organic growth is a lot less inspiring than you might suspect. In late April, 3D Systems announced that first-quarter sales in the U.S. fell 20% sequentially “signifying a large organic deceleration in the quarter,” according to Merrill Lynch. They rate shares as “underperform,” with a $45 price target, based on “the likely peaking of organic revenue growth and risks associated with the long-term margin profile as recurring revenues will take much longer to build up relative to our original expectations.”

Merrill’s analysts echo some of the concerns I raised last September as well. They note that gross margins are falling, free cash flow remains negative, inventories grew faster than sales in recent quarters, and roughly 10% of accounts receivables are past 90 days, which is an unusually high number. These analysts suggest that management’s recent guidance for the remainder of 2014 may be hard to achieve “given the near term pause seen in (last year’s fourth quarter and this year’s first quarter), and the timing of new product launches.”

Risks to Consider: As an upside risk, a major new contract with a Fortune 500 industrial firm would provide a great endorsement for this company and its technology.

Action to Take –> The bullish analysts at Pacific Crest and Canaccord are right to suggest that sales of 3-D printers can rise at a solid clip for an extended period. So they figure that very rich price-to-sales multiples are justified. But in the context of slowing organic growth, margin pressures, and troubling balance sheet metrics, this stock still holds a lot more risk than reward. Yet if the second quarter brings more headwinds, as Merrill Lynch suggests, and this stock falls below $40, then investors should be ready to pounce and buy shares while others are heading for the exits.

P.S. Three-dimensional printers are exactly the kind of game-changing technology my colleague Andy Obermueller is always hunting for on behalf of readers of his Game-Changing Stocks advisory. In fact, in his latest report, Andy’s spotlighted 3-D printing as one of the most promising trends around. To learn more about these developing technologies — and the companies behind them — follow this link.