3D Systems (NYSE:DDD) develops, manufactures and markets 3D printers, print materials, on-demand custom parts and 3D solutions. The company has been a popular stock pick this year for those wanting to ride the 3D printing super-trend that is taking the world by storm.
However, investors have a habit of getting ahead of themselves in growth markets and it looks like that is now happening with 3D Systems.
There is no doubt that 3D printing has a very bright future and its possible applications are seemingly limitless. From cosmetic breast implants to building jet engines, most of us are now aware of the coming revolution.
The problem is that valuation measures for 3D Systems have skyrocketed this year and there is now enough uncertainty to make the current high stock price unsustainable.
Fast expansion disguises numbers
Although 3D Systems' finances look impressive, it is important to note that the company has acquired no less than 39 companies since 2009. While this has helped put DDD into a more competitive position it also makes it more difficult to accurately analyze the organic growth that 3D Systems is creating.
Another cause for concern regards the fact that chief executive, Abraham Reichental, recently sold off a fifth of his own shares in the company. 3D printing is regarded by the street as the next big industry so it does not make sense that the CEO would sell such a big position.
There is also the problem of newcomers coming to market that could hurt 3D Systems over the longer term. A couple of years ago 3D Systems was one of a few players in the industry but we are now seeing many more competitors, with the likes of Voxeljet (NYSE:VJET), and Hewlett Packard (NYSE:HPQ) entering the field.
Indeed, with Hewlett-Packard likely to enter the 3D printing game sometime in 2014, there are obvious dangers to the notion that 3D Systems is the ultimate 3D printing play.
With $13bn in cash, Hewlett-Packard has the resources to make a big impact on the industry.
3D Systems no longer has a major competitive advantage and the fear is that investors will begin to move away from the 3D printing industry per se and instead focus only on a select number of companies within that niche. DDD has that potential but speculators have bid the stock up to unsustainable levels too soon.
Last week the stock pushed through the $80 level for the first time and is now overbought on almost every timeframe.
The move up has 3D Systems trading with a staggering PE of 173.53.
Take a look at the below weekly chart and see how 3D Systems is now in parabolic territory:
(click to enlarge)
Parabolic moves occur when a stock moves up in such a fashion that the rise becomes exponential in nature. As the stock moves higher the price rise begins to look dangerously extended. The chart soon appears like the right hand side of a circle as it nears the diameter.
Parabolic moves often occur at the end of bubbles and I have found them to be excellent opportunities to go short.
As you can see from the chart of 3D Systems the stock is now in parabolic territory signaling that rampant speculation is taking place. 3D Systems may well go higher in the long term but the short term situation is telling us that upward pressure is so built up that a sharp downward move is imminent.
Indeed, the drop in 3D Systems when it comes will likely be exaggerated by speculators scrambling to close their positions at once.
You only need to look back to March of this year to see what happens after a stock turns parabolic. 3D Systems dropped to under $30 under a similar type of scenario.
Another reason to sell
While the chart pattern for 3D Systems is compelling, there are more reasons why 3D Systems investors should take their profits here.
With the sharp rise in share price, 3D Systems managers are likely to hold out for something more than the $90 offered by IBM. That will most likely lead to a backing off from IBM with any buyout likely to be delayed till 2014. The rumors that have helped propel 3D Systems towards the $90 mark will therefore deflate and the stock price will drop to more sustainable levels.
With such uncertainty looming, does 3D Systems really warrant a market cap valuation of $8.24bn?
Certainly recent earnings for the company have been promising, with 3rd quarter revenues rising 50% to $135.7m. But we also mustn't forget that management cut its 2013 earnings forecast to 0.93 - 1.03 per share.
3D Systems has a bright future ahead but the stock is simply too expensive to be a buying opportunity. No stock ever went up in a straight line (which is what the current chart is telling us) and the chance of a short sharp correction is now extremely high over the next couple of weeks.
Parabolic moves like this one can precede sharp corrections of up to 50% and there is no reason why 3D Systems could not drop to $40 under the market forces of speculators liquidating their positions.
This would give long term investors a great chance to re-enter positions. My price targets are more modest and I would look for 3D Systems to drop back to around the $60 mark.
For now, those holding 3D Systems should consider liquidating their positions and awaiting a more favorable entry. For those more bold, 3D Systems offers a good opportunity for a high risk short position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.