Will The Market Drag Down 3D Systems?

Jul.11.14 | About: 3D Systems (DDD)


3D printing stocks surged on takeover rumors last week only to give back gains.

The sharp selloff in the momentum stocks might weigh on 3D Systems in the short term.

There is still plenty of upside left in the long run.

3D Systems should get support at two key areas to keep the rally alive.

It has been interesting to watch 3D printing stocks in the last couple of weeks. In my latest article on 3D printing stocks, I suggested that they are ready to rally, and they proceeded to rise significantly in the next two weeks. The short-term top was achieved last week, when the stocks ran up between 10% and 30% in one day on buyout rumors. As the general market ran into trouble at the start of this week, momentum stocks took a beating, and 3D Systems (NYSE:DDD) and its peers followed suit. I believe that the state of the general market is the main cause to be concerned and that 3D Systems' share price will suffer if the market keeps going down. However, the long-term prospects for the company and the industry remain upbeat.

Takeover rumors and short interest spark a rally and the momentum selloff kills it

In my last article on 3D printing stocks, I laid out the reasons for a rally in 3D printing stocks: most of the companies are delivering robust growth rates, valuations have improved and short interest was high. 3D Systems and its peers proceeded to rally in the following two weeks, and 3D Systems almost hit my $70 price target on July 1, as the high of the day was $69.56. These recent highs were reached after takeover rumors surfaced. 3D Systems cancelled its Pacific Crest conference appearance because of "management scheduling conflicts." However, the cancellation has resulted in rumors about a potential takeover. This is essentially good news for 3D Systems and its peers, as it adds to increasing interest for 3D printing and the stocks in the group would trade higher due to acquisition premium pricing. However, if rumors turn out to be unsubstantiated, the group is due to a correction as the premium dissipates, which is what might have already happened, as the stocks pulled back significantly afterwards. I'm sure that further consolidation in the 3D printing space is realistic in the future, but the timing is certainly unknown at the moment. I also believe that 3D Systems is more of a suitor than an acquisition candidate at the moment (given its history of aggressive buying habits), but I would not rule out the possibility that the company is a takeover target.

The move up was certainly amplified by high short interest, and it will be interesting to see the short interest numbers for the first half of July. 3D printing stocks pulled back significantly after the initial spike and part of the reason for the move down is the selloff in the momentum stocks this week, which dragged most of the high growth stocks down, and 3D printing stocks were among them. I believe that this is the main reason to be concerned about 3D Systems and its short-term share price. We can see the potential impact of the momentum selloff in 3D Systems' chart, as it went down more than 50% in the first four months of 2014. This move down has accelerated in March, which was the time of the great momentum stock correction, as many stocks went down 50% or more, particularly in the technology and biotech space. If this kind of selloff gets underway once again, 3D Systems might revisit the late April lows or perhaps lower this time.

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Source: Stockcharts.com

The long-term prospects remain intact

The concerns I highlighted are short-term in nature and may not materialize. The long-term prospects for 3D Systems and the industry remain intact. I laid out the reasons to be bullish on 3D Systems in the long run in my analyst day article:

- 3D printing market is expected to grow at a CAGR of 32% from 2013 to 2020, and the global manufacturing market has significant room for the company to expand.

- 3D Systems management expects to reach $1 billion in revenue in 2015.

- The recent secondary offering strengthens to company's cash position which will be used for more acquisitions in the future.

These are some of the reasons to be bullish on the long-term prospects of 3D Systems and the 3D printing industry.

Downside risks and support areas

3D Systems' share price should get support at $55 and $50, which are the most important short-term areas for the stock. The $50 level is more significant as it served as both support and resistance in the last two months, while the $55 level is roughly the breakout level which the stock penetrated in late June. Additional downside is possible. I have argued in my late May article on 3D Systems that the downside should be limited to $40 to $45 based on the 18-month P/S ratio range, and I believe that this fundamental price range is a very attractive entry for long-term investors and a potential place of major accumulation by institutional investors.

Click to enlarge

Source: Stockcharts.com


The state of the general market remains the main cause for concern for 3D Systems' investors. The selloff in the momentum space has dragged the stock down this week and might continue to do so in the next couple of weeks. However, the long-term prospects remain intact, and the stock should be trading at a higher level in the future. The reward/risk ratio here is slightly favoring the bull side, as the upside is almost 30%, while the downside is between 20% and 30%. But the upside could be as much as 40% or 50% if the company gets a takeover bid.

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.