Plastic and Clouds: two boom-bust processes

Salesforce (CRM) and 3D Systems corporation (DDD) look like they are at two very different different stages of a boom cycle, and one of them actually has prospects for escaping the bust scenario altogether.  However, they both used the same means of achieving their success.
The purpose of the stock market is to raise equity for company growth. However, some companies become too dependent upon this feature as the only means to achieve growth. They enter cycles where they overspend to generate growth, fill in their cash flow gap with share issues, and achieve growth in earnings and share price, furthering the effect of future share issues, a process described in George Soros’s Alchemy of Finance.
Salesforce looks to be at the peak of such a cycle. It has used its ability to tout its stock as the forerunner in the technology surrounding the cloud, while failing to generate earnings. CRM runs at a negative free cash flow most quarters because of its high capital expenditures. It continually needs to purchase new servers to serve new customers, and it pays for these new servers by selling more of its overpriced stock.
Investors are still willing to pay high prices for the stock because it is generating revenue growth. However, eventually it will be realized that revenue growth cannot be rewarded in the absence of positive earnings. A turning point will be reached, and CRM will become a good short play. It pays to be cautious however, because positive reflexive processes tend to last longer than anyone realizes.
3D printing has been hailed as the next big thing. I personally think it stands a good chance of actually being a revolutionary technology, and its positive earnings make it a more attractive investment than CRM ever was. However, 3D systems corporation is showing classic symptoms of the boom-bust.
The cash flow is very negative (i.e. a negative number on the order of hundreds of millions, while earnings are on the order of tens of millions) because of the intensive growth investments the company is making, and it is paying for these investments by issuing shares. Perhaps this can be forgiven, because of its status as a recent IPO – after all that is what IPO’s are supposed to do: issue shares to produce earnings growth. Time will tell if the process continues into subsequent quarters.
3D systems corporation may be able to generate enough earnings growth to “grow into” its multiple. Currently its P/E is 63, but the earnings growth was over 80% year-over-year. A larger earnings growth figure than price to earnings multiple is a positive sign for a growth company.
Therefore, 3D systems warrants a look as a potential speculative investment. The stock market could pull back after the election, so I am only going to invest a small portion now, and dollar-cost average into the stock over the next few weeks.

Validating the Short

The market has lent some credence to my idea that U.S. stocks are overbought. The unimpressive Google (GOOG) earnings provided the pinprick the stock market needed to fall.

I would expect the fall that commenced on Friday to continue and intensify this week, with some minor pullbacks caused by positive earnings in some U.S. companies. I have therefore put on a 50% increase in my short position (SPY).

Disclosure: I am short SPY.