Bottom Is In For 3D Systems

Jun. 9.14 | About: 3D Systems (DDD)

Summary

Open-ended potential for 3-D printing; aviation, food, medicine, mobile and fashion.

Partnerships with Google, Intel and Hershey.

Still risky, but 50% drop gives investors an opportunity to buy.

Last November, at a price of $80 a share, I wrote that 3D Systems (NYSE:DDD) had entered an extremely overbought state which could only end in a significant share price correction.

Although the share price proceeded to fall around 13% after I made the claim, 3D Systems ended up going higher by another $17 before the bubble finally popped.

Since then, 3D Systems has lost nearly 50%, hitting a low of $44.80 in April of this year.

Now that the sharp price fall has taken place, there is very little value left for shorts, and the next direction for DDD shares is likely to be up.

Real-world benefits

Without a doubt, there are many risks involved with buying 3D Systems shares. A forward PE of 42.39 is evidence that the company is not cheap and is still regarded as a speculative play.

When this is the case, any traditional valuation method, such as DCF (discounted cash flow) or CAPM becomes pretty much useless. For companies in game-changing industries (which 3-D printing undoubtedly is) success can be pinned just as easily to qualitative factors as quantitative.

There is good reason for high PE ratios though, just like there is good reason for optimism in 3-D printing as an industry. Last week's Bank of America Merrill Lynch Global Technology Conference highlighted some of these reasons and proves why 3D Systems could still be the stock of the future.

Partnerships

All too often when talking about 3-D printing, thought turns to the carving out of plastic figurines or barely useful souvenirs. But there will be so much more to 3-D printing than that; in aviation, medicine, food, mobile technology and more.

For me, the potential partnerships that DDD alluded to in last week's conference form the most exciting part of the story.

3D Systems spoke of opportunities in food printing with Hershey (NYSE:HSY). Such opportunities will allow the more repetitive tasks of food creation to be streamlined. In mobile, 3D Systems is working with Intel (NASDAQ:INTC), whose 3-D printing chip, RealSense, has just been launched.

Speculation that the next Apple (NASDAQ:AAPL) iPhone could have its own 3-D scanner could easily lead to many more opportunities down the line. Meanwhile, potential agreements with Google (GOOG, GOOGL) could be even more exciting. Management spoke of embedded conductive printing, electronics printing and modular cellphones. Projects that will be ''very relevant to the Ara phone'' and ''relevant to 100s of other applications over time too." Google is clearly the type of tech giant you want to have in your corner, and it has expressed interest in working with DDD in at least 3 unique areas.

Tipping point

While commercial partnerships will be important to 3D Systems' growth, could there possibly be a tipping point for the industry as a whole?

The rapid take-up in the classroom suggests that could well be the case, and 3D Systems has seen 3-D printers being put into school classrooms all the way down to fourth grade. As more and more kids are taught how to use 3-D printers, the printers themselves will become more familiar, and will soon be a part of the average American household.

As Hugh Evans, VP of Ventures and Business Development, puts it, "a tipping point would be a 3-D scanner chip in your cell phone so you can just click and make". And that is how sales of 3D Systems' printers could easily hit millions of units a year sometime in the not-too-distant future. Making 3D printing a truly open-ended economic opportunity.

Technical outlook

While the future will no doubt be good for 3-D printing, as I mentioned earlier, the technical outlook forms a big part of any analysis on 3D Systems too, principally because the market has been subject to such intense speculation.

The technical picture now is vastly different to what it was at the end of last year, when I made my somewhat early sell call.

Today, 3D Systems trades almost 50% lower, and short sellers (unless unreservedly greedy) will almost certainly be closing out their positions at these prices.

Looking at the price chart, there is a descending upper trend line that is quickly converging on the price level. $56.64 is the level to watch, and a break of this would surely see all remaining shorts exit their trades. That would lead to a sharp short squeeze and see 3D Systems move up to $65 in a short space of time.

From there, the stock may drop back again slightly before building a much more sustainable advance.

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.