“In the short term, Wall Street is a popularity contest; in the long term, it’s a weighing machine.” This popular maxim, paraphrased from value investing guru Benjamin Graham, should be investors’ mantra to stay focused on the long-term prospects of stocks. Because over the short term, Wall Street holds all the cards.
With this in mind, let’s review Tesla Motors Inc (NASDAQ:TSLA), 3D Systems Corporation (NYSE:DDD) to determine whether either is a candidate for a long-term investment.
Retail Investors vs. The Pros: A Short-Term Mismatch
First, let’s review the environment in which these companies trade. Wall Street eschews the long-term in favor of quick wins, with quarterly results used to measure performance.
Powerful computers automatically read the news and social media posts, making interpretations, and executing thousands of trades a second. Trading computers are physically positioned next to exchange servers to reduce trading times down to microseconds. In some cases, market-moving data are provided to paying customers prior to public release –
According to CNBC (emphasis mine): “A contract signed by Reuters … and the University of Michigan … stipulates that the data (Michigan Consumer Confidence Report) will be posted on the web for the general public at 10 a.m. on the days it is released. However, five minutes before that, the data is distributed… for Reuters’ paying clients.”
Competing and winning consistently in this trading environment is, at best, a long shot for the individual investor. The good news? Wall Street’s short-term mentality leaves individual investors with long-term investment opportunities.
For my investments, I look for companies in a growth market with clear advantages over the competition (wide moat) and a valuation in-line with future growth prospects.
So how do Tesla Motors Inc (NASDAQ:TSLA) and 3D Systems, two Wall Street darlings, rate as long-term investments?
Tesla: Too Much Too Soon
Elon Musk is a genius, and the Model S is a beautiful, drool-worthy machine. The stock, however, might as well be stinkweed for the appeal it holds for me right now.
Are electric cars a growth market? No question: IDTechEx estimates that by 2025, 10% of all cars sold will be pure electrics.
Does Tesla Motors Inc (NASDAQ:TSLA) have a clear advantage over it’s competition? Hmmmm… kind of:
There is no doubt that Tesla is miles ahead of the competition with its premium-priced S Model. Consumer Reports gave it a 99/100 review score, the highest in the magazine’s history. But can Tesla deliver a compelling car model that appeals to a mass market? Tesla Motors Inc (NASDAQ:TSLA) faces formidable hurdles:
First, Tesla will need to rapidly expand its refueling network to support growth. Next, during these times of austerity, Tesla needs the government to maintain clean fuel tax credits to subsidize Tesla Motors Inc (NASDAQ:TSLA)’s cars purchase price. Finally, Tesla will need to overcome the mass market preference for hybrids versus electric vehicles. That’s a high order, but Tesla bulls may feel that Musk is up for the task.
But what about Tesla’s valuation? I haven’t heard a cogent argument why, given the business risks, Tesla is worth 25% of the value of General Motors.
Remember, current estimates indicate that the total global electric car market in 2025 will only be 10% of the overall car market. GM currently has 11.6% of the global car market. For me, the disconnect between Tesla Motors Inc (NASDAQ:TSLA)’s valuation and the anticipated market size is simply too large.
3D Systems: How Can it Grow Into Its Valuation?
Additive manufacturing (3D printing) is one of the most exciting long-term market advances of our generation. It involves laying down thin layers of material, layer by layer, until a manufactured item is fully formed. While 3D Systems Corporation (NYSE:DDD) printing is slow compared to current manufacturing processes, it provides an ideal solution for complex, low-yield products and parts.
According to Wohlers Associates the 3D printing market will reach $3.1 billion worldwide by 2016 and $5.2 billion by 2020. This is strong, but not market changing growth.
Currently 3D Systems Corporation (NYSE:DDD) is trading at a valuation of $3.9 billion, or 1.25 times the total estimated global market size for 3D printing for 2016!
In comparison, Apple Inc. (NASDAQ:AAPL)’s valuation of approximately $400 billion is less than a third of the estimated global smartphone market size of $1.6 trillion in 2018.
If Wohlers market size estimates hold true, common sense indicates that 3D Systems Corporation (NYSE:DDD)’s current valuation has exceeded rational expectations. Bullish investors can certainly argue that market size estimates are too conservative, and that unanticipated 3D printing innovations could lead to faster market growth. However, for me, “hoping for the unexpected”, as well as 3D Systems Corporation (NYSE:DDD)’ frothy valuation, makes the company too risky for a long-term position.
Foolish Bottom Line
Long-term investors need to keep their focus on companies that are well-positioned from a strategic and valuation standpoint. Both Tesla and 3D Systems Corporation (NYSE:DDD) are exciting companies in growth markets. However, the companies’ current valuations don’t seem to warrant the attention of a long-term investor.
Critics will likely point to the strong upward trends of these companies’s stock charts as reason enough to invest in them. And while some will certainly make money trading in and out of these stocks, the individual investor needs to be aware when it comes to short-term trading, the odds are always stacked against them.
Bill Shambllin owns shares of Apple. The Motley Fool recommends 3D Systems, Apple, and Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of 3D Systems, Apple, and Tesla Motors and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Wall Street Loves The Short-Term: Tesla and 3D Systems originally appeared on Fool.com is written by Bill Shambllin.
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