Of the main 3D printing (3DP) investments, small-cap ExOne (XONE:Nasdaq) has had the least time in the sun, since September. The stock went off its peak following weak earnings, a fresh 1.1m share issue, and the unlocking of 1.5m shares. The combination added approximately 22% more shares to the float, and 8.5% to shares outstanding. Smelling opportunity in the September news, shorts flocked in, and aggressively worked ExOne from its $78 peak down to $42. ExOne has since recovered some of that territory (closing at $55 on Friday), but its peak of $78 is still months behind on a seemingly out-of-reach shelf. That's ExOne's recent backdrop.
In the process of those events, a new market condition evolved, and I believe that condition justifies investment in ExOne. I say that because an imbalance has formed, and it suits longs. The condition is high short interest. Since September, ExOne has had a higher level of short interest than any other 3DP stock. In fact, it has one of the highest rates of short interest on the Nasdaq. At the time of my writing, it's near 46%, which is exceptionally high. That contrasts with 3D Systems' (DDD:NYSE) 17%, Stratasys' (SSYS:Nasdaq) 4.7%, VoxelJet's (VJET:Nasdaq) 21%, and Organovo's (ONVO:NYSEMKT) 10%. So how might ExOne's short interest impact the stock?
In the Abstract
If certain conditions are met, high short interest can have the effect of supporting a stock's price, and protecting it from high volume shorting; it's also an indicator for short squeeze potential, should the market move the share price upward. Short interest is also an indicator for historical bearish sentiment. Therefore, specifics are required to tell whether the short interest is justified, or constitutes an incentive to buy the stock.
Is ExOne's Short Interest Justified?
To answer that question, I'd like to look at two basic indicators: target price and forward P/E. Both are designed to be predictive of a stock's future, given the most reasonable assumptions about its performance. After looking at those indicators, I will move forward with some direct analysis of the company's prospects.
To begin with the price targets, fresh ones were issued by Deutsche Bank ($55), and Jefferies ($72) on Dec. 9 and 10, for an average of $63.50. Alternatively, a composite target could be formed by averaging even more analysts, if one is willing to use slightly older valuations. For instance, Yahoo Finance cites seven analysts for a mean of $67.43, and a median of $72.
Forward P/E Comparison
In case you were looking at ExOne's targets, and asking why they are what they are, they are based on ExOne's earnings forecast. This table shows forward P/E for the major 3DP companies.
*Price/Earnings Ratio is given by dividing the Last Sale Price by the Average EPS (Earnings Per Share) Estimate for the specified fiscal time period.
Dec. 22, 2013
Stratasys and 3D Systems are clearly at the top of this heap. ExOne, being a newer company, is still playing catch up; however, its projected rate of increase is faster, and by 2015 it's predicted as closing most of the gap. Column 2013 tells part of the reason shorts flocked to ExOne, but also shows why they will probably regret it in 2014-2015, as ExOne's forecast revenue growth begins taking effect.
Now a Look at ExOne
My third level of scrutiny is a direct analysis of the company's capabilities and its potential. This analysis is centered on the materials ExOne uses, the potential applications for those materials, and the impact that could have on the market itself. I stake my claim that ExOne could become central to a new industrial revolution, and that its valuation is tied up in that potential.
ExOne sells 3D printers that work with glass, metal (stainless steel, bronze, tungsten), and sand (for sandcasting molds and mold cores, used in metal casting). Industries which fabricate, or could benefit from fabricating, these materials into something more than a rudimentary shape are potential sources of revenue for ExOne. The target market is virtually untapped, and ExOne is poised to become a chief provider.
To get more specific about which industries could use ExOne's printers, I will review some of the relevant industrial applications they could have.
- Sandcasting molds are applicable to any industry which uses a foundry for casting metal parts. That includes automotive, machine tools, casings, heavy industrial parts and fittings, maritime and military applications, etc.
- Tungsten has an incredibly hot melting point, making it useful for high performance specialty demands where heat resistance is required. It is specifically used in jet aircraft engines, whose moving parts require heat resistance and absolute precision (for spinning at high RPM). These parts are expensive; ExOne printers could become central to their production.
- Bronze is ubiquitous for maritime purposes. Because of ExOne's capabilities, it's not difficult to imagine a future where larger ships are able to fabricate their own parts at sea.
- Stainless steel is universally applicable; the ability to shape it freely could have revolutionary impact across multiple domains.
New Industrial Revolution
ExOne would inevitably be a part of all the things mentioned above, but I really don't think that does enough justice, even yet, because 3D printing makes materials more pliable than they were before (in terms of possible shapes). It also brings production cost within reach for things which would have been prohibitively expensive. On that note, ExOne's technology could likely become essential to remaining competitive within its target industries. If one company can make parts whose shapes defy imagination, opening the doors of innovation, its competition will either buy the industrial scale 3D printer to catch up, or be relegated to the low end. At this point you should see that ExOne could be the forerunner of a new industrial revolution.
This all builds up to one central point: The business logic behind ExOne's concept is rock solid. If the company's first year was less than profitable, that's nothing but the inertia of starting a new business. If the company issued shares to raise funding, it did cause a little stock inflation, but the company is using the funds to expand. The earnings forecasts and price targets reflect this company's prospects quite well, and the technology is cutting edge. If anything, I believe ExOne's target prices are too low, considering ExOne's potential to become a transformative force for industries across the globe.
Rapid Climb Potential
When deciding whether a stock is good for potential investment, I look for reasons it can appreciate, and over what frame of time. In ExOne's case, I believe the company's potential and improving earnings will bring share price upward, over the course of 2014-15. Momentum from the 3DP sector could certainly help. Once this trend reaches critical mass, I expect to see ExOne's 46% short interest burnt off like logs in a roaring bonfire, consumed both suddenly, and unstoppably. I would not be surprised to see ExOne exceed its price targets, under that kind of upward pressure.
Another characteristic I look for in a stock is a strong floor of support. I certainly hope for more than just that, but protection against backsliding is also important. ExOne's case is compelling. Going back to what I said earlier, high short interest can support a stock's floor; this phenomenon is well-demonstrated in ExOne. A consultation of its graph, since September, will confirm that for you.
Click to enlarge image.
ExOne's 2013 Performance, as of Dec. 22
At 46% short interest, it's the shorts, themselves, who support ExOne's floor. That reduces riskiness for longs, as they wait for growth and covering to move the stock higher.
I cannot help but view ExOne as a massive bear trap. So what are all these shorts doing here? They should have gotten out back in September, when market sentiment couldn't oppose them. But now it's months later, 46% of ExOne's float is still sold short, and its share price is at the absolute low end of the most recent price targets! ExOne has a solid floor supported both by the market, and by analysts' targets.
They reason that ExOne has tremendous growth potential to sell industrial scale 3D printers to a virgin market, and I believe I've explained why. To confirm that, the earnings projections for 2014-15 are reflected in the forward P/E, which you see is climbing. That would logically raise the share price and, as ExOne's share price climbs towards its composite target price, its 46% short interest could become catalyzed into a massive climb -- well above anyone's target. This possibility provides an extraordinary opportunity for new entrants: Stock in a good company with a built-in safety net, and the potential for lightening-fast gains. ExOne has it all, which is why I'm calling small-cap ExOne a high alpha stock and potentially the best 3D printing investment at this time.