Short interest in 3D Systems (NYSE:DDD) reached a record high in mid-August, at 36.87m shares. This represents 34% of the total number of shares and 35% of the float. Year-to-date, short interest in the stock is up 151%. And more interestingly, it's up 2% or 801k shares since late July, while the stock price decline following poor Q2 earnings could have sparked investors to cover their short positions and take their profits.
Since our January article "Competition To Heat Up As Key Patents Expire, Earnings Risk On The Downside", we have been Sellers of the stock, saying that the expiry of key patents between 2014 and 2017 would spark increased competition and pricing pressures across the industry, as open-source hardware printers would be able to integrate laser sintering. These declining ASPs suggest significant pressure on gross margins as prices go down, while costs remain high due to continued investments. The fact that investors continue to add to their short positions while the stock is down 45% year-to-date suggests that many of them now share our view. It's also likely that many investors assume that 3D Systems will not reach its FY14 revenue target ($700-$740m). As we explained in a previous article, this guidance implies second-half growth will accelerate to 40%-50% from 25% in Q2... despite tough comps (+50% growth in Q3 13 and +52% in Q4 13). The company claims a record backlog, new product introductions and the contribution of Robtec and Simbionix. Fine, but the bar is nevertheless set extremely high at a time when industry conditions have become much tougher. There is clearly no room for error, and any delay in a product shipment would lead 3D Systems to cut its guidance. The risk is clearly on the downside.
Even if a short-term short squeeze is always possible, we believe that this rising short interest does not bode well for the stock price. It suggests that investors have growing concerns about the company's outlook and valuation and that the stock price decline year-to-date does not yet fully captured fundamental issues. We reiterate our negative stance on the stock and our $26 target price.
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