3D Systems (NYSE:DDD) has made a strong rally since mid-June and the stock has gained 26% -- in the process, 3D Systems has crossed the psychological barrier of $60 after being range-bound for the past two months. I expected the stock to be range-bound in the short term, which I explained in my previous article. However, some latest developments have pushed the stock price up and the upward trend has started earlier than my expectations. Nonetheless, I believe the stock is ready to push this upward trend further over the next few months as the fundamental growth in the second half of the year will be stronger for the company.
One of the biggest factors in pushing 3D Systems over $60 is the rumors about a takeover. The rumors gained momentum when the company canceled an appearance in a conference due to scheduling conflicts for the management - 3D Systems was scheduled to participate in the Pacific Crest Securities conference in August. The cancellation of the participation for the event has prompted the analysts to speculate that the company might be a takeover target. The timing for any takeover might be good for a number of reasons. First of all, the stock is trading substantially lower than its all time high of $96 - the 3D printing sector has lost considerable value over the last few months and the stocks are trading at substantially lower prices than six months ago, which shows that these stocks have lost a considerable speculative premium and trade closer to their fair value. Furthermore, the prospective buyer might believe that a stronger showing during the second half of the year will further add premium to the price and this might be the best time to buy.
The second reason might be the enhanced cash position of the company. As I explained in a previous article, the company has strengthened its cash position through the most recent equity issue - you can read about it here. The cash position of the company makes it attractive for the takeover as it enhances the balance sheet of the company. Furthermore, the cash reserves give an advantage to 3D Systems if it wants to pursue a strategic decision such as merger or an acquisition.
Finally, one of the most important reasons could be the wider acceptance of the 3D printing technology. We are currently seeing 3D printers getting more attention due to the affordable prices. The technology is currently entering a phase where we might see a robust marker develop for 3D printers over the next 2-3 years. The declining prices of 3D printers will affect the margins of pure 3D printer manufacturers; however, 3D Systems will benefit from a wider acceptance of 3D printers as the company has a strong materials segment, which is a high-margin segment of the company. These factors make it understandable why any prospective buyer would want to acquire 3D Systems in the current market conditions. However, this is all speculation at the moment as no concrete news about the takeover has come out.
I believe 3D Systems' rally will continue in the short term, and the upward trend will stretch to the end of the year. One of the reasons for the rally in the short term is the high level of short interest in the stock - at the moment, At 13th June, 3D Systems had almost 34 million shares short according to NASDAQ, with average daily volume of about 3.5 million - this gives the short sellers just under 10 days to cover. The image below was taken from NASDAQ and shows the current short interest in 3D systems.
The short interest reported at 13th June has been the highest for 3D systems in the last twelve months, and incidentally, 12th June has been the starting point of the current rally in the stock price. The rise in the stock price along with the rumors about the takeover has startled the short sellers, which has further supported the rally. I believe we will see a considerable decline in the total short interest when NASDAQ publishes the end of month figures for the company. I am expecting the fear to persist in the market and we might see further decline in the short interest as short sellers continue to cover their positions amidst the rumors of a takeover. As a result, I believe the rally in 3D Systems will continue in the short term, and as the year progresses, the company will have a stronger second half of the year, which should support the increase in the stock price.
It was a great opportunity for the long-term investors of the company to add to their positions over the last few months as the stock lost its value. I am expecting a rise in the stock price over the next few months and still maintain my price target of $86 per share. I believe the company is well positioned to benefit from the wider 3D printing market - the growth in the top-line remains strong for the company with organic growth of close to 30%.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.