3D Systems Now Has More To Prove

| About: 3D Systems (DDD)


3D Systems had a large Q2 miss.

2014 revenue forecast was raised, EPS forecast maintained.

More pressure put on the second half of the year.

Short interest remains quite high.

Pullback provides an opportunity for those who believe in the name.

Last week, 3D Systems (NYSE:DDD) reported Q2 earnings, and the report was not good to say the least. Both the top and bottom line came in well short of expectations, and the stock dropped on the news. However, the company did raise its yearly revenue range, and maintained its non-GAAP EPS forecast. Today, I'll explain why the company now faces more pressure, and what it means for investors.

For Q2, the company came in at $151.5 million in revenues, which fell well short of estimates for more than $162.2 million. Non-GAAP earnings per share came in at $0.16, which missed by two cents. While Q2 revenues rose by 25% over the prior year period, analysts were looking for more than 34% growth. Any way you slice it, this report was a huge miss, and a big disappointment. Shares fell $6 on the news last Thursday, and have fallen even further since. The current share price is the lowest we've seen in almost three months, even lower than when I detailed how a major short squeeze could occur. We did see a sharp rise in shares to nearly $70, but now we're back in the high $40s.

The company normally posts a larger share of its yearly revenues in the second half of the year, so this puts even more pressure on Q3 and Q4. Additionally, the company actually raised its revenue forecast for the year. 3D Systems now expects 2014 revenues of $700 million to $740 million. That range is $5 million higher than the previous range. The company also reiterated its non-GAAP EPS range of $0.73 to $0.85 for the year.

As you can most likely guess, analysts have become a bit more skeptical after the Q2 miss. Going into the Q2 report, analysts were looking for $713.82 million in revenues this year. Current estimates call for $707.14 million. Analysts are now about $13 million below the midpoint of the company's forecast, and almost at the bottom end of the range. Should the company come in even at the midpoint of its range this year, it will be a huge beat against current estimates. In terms of non-GAAP EPS, analysts are now looking for $0.80 a share, down a penny from where estimates stood going into the Q2 report. Analysts are a penny above the company's midpoint for EPS, which goes against what they see for revenues.

There were a number of analyst downgrades after the Q2 report, which is not surprising given the large miss on both revenues and EPS. Overall, analysts are still fairly positive on the name, with the average recommendation being a slight to moderate buy. Both the mean and median price targets are in the high $50s, implying about 25% upside from current levels. Just like investors, analysts are a bit divided on this name, as the price target range goes from $45 to $84.

For investors that still believe in this name, this selloff may be an opportunity to buy. Not only are shares at multi-month lows, but expectations have come down a bit, which makes it easier to beat. As I've detailed above, analysts are near the low end of the company's revenue range. Additionally, this remains a heavily shorted stock. The latest short interest update showed a new high in short interest. More than a third of the float was short, after a 132% year-to-date rise in short interest. We'll have to wait a couple of weeks until the mid-August update to see how shorts responded to the earnings report. It would not surprise me if short interest does come down then as shorts take some profits on the fall. However, even if short interest drops by 25%, you'd still see roughly 25% of the float shorted. If the company announces any good news, a major short squeeze is still possible.

In conclusion, 3D Systems now has a lot more to prove in the second half of 2014. The company's second quarter report was terrible, yet the yearly revenue forecast was raised and the EPS forecast was maintained. Shares have taken a necessary hit, but this could be an opportunity for investors who still believe in the name. Short interest remains at an exceptionally high level, meaning any good news could lead to another short squeeze. In the high $40s, this name is a much better buy than it was a few weeks ago when shares were $20 higher.

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: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.