3D Systems Corporation (NYSE:DDD) saw its stock plummet after its earnings came in below consensus and weak margins seemed to reinforce the short argument, but its stock price has recovered recently as analysts rally to the stock. Now Citi analyst Kenneth Wong has raised his price target to $78 from $68 (currently $65.76) based on a 10 year DCF valuation with an 18x multiple and reaffirmed his Buy rating for 3D Systems.

DDD price performance 0214

3D Systems well-positioned for expanding market: Citi

“We believe investing for growth is the right strategic course. Dialing back EPS reset margin expectations and will properly align investors with the current growth direction of the company. We continue to view the market favorably and believe 3D Systems Corporation (NYSE:DDD) can sustain 20s growth over the medium term,” he writes. “We believe 3D Systems’s diverse product line ranging from full metal sintering (Phenix) at the high end to a $1,000 desktop device (Cube) for the consumer is best positioned to capture the expanding market opportunity.”

3D Systems Corporation (NYSE:DDD) certainly has a lot of buzz around it, and the notion of 3D printing is fairly mainstream at this point, but the current valuations, not only for 3D Systems, assume fairly rapid growth for a market that is still on the fringe and which has to spend an enormous amount on R&D to stay competitive. An immature market may be good for future growth, but an immature technology means that each iteration gets outclassed by the next in short order making it difficult to recoup development costs.

3D Systems’ OPEX costs above industry standard

But even for an industry that spends a lot on development, 3D Systems Corporation (NYSE:DDD)’s OPEX costs are so high that even if it hits revenue targets, the margins will be too low for meaningful profits. Also, guidance suggests that sales are going to be backloaded this year, with about 60% coming in the second half, which could be seen as a way of delaying further bad news just as the 2013 numbers were being reported. Some hedge fund managers like Whitney Tilson (who is shorting the stock) have said that 3D Systems management and analysts are being disingenuous, wishing they could both be injected with a “truth serum.”

“3D printing is real, but the stock valuations aren’t,” writes Tilson.