In my article “3D systems Q2 Earnings- How I’m Playing it and Why” written prior to the company’s Q2 release, I wrote that I was basically waiting for Q3 to go “all in” shares of 3D Systems (DDD), and the reasons why.
Since then, the company’s announcement of constraints in direct metal 3D printer production capacity led to lowered Q3 earnings and a 25% decline in share price in the last 3 weeks.
Because the Q3 miss was primarily due to issues of production capacity (now corrected according to management) and not demand, I’m now “all in” with a full position.
I believe the bottom for 3D Systems is either in or very near based on reasons I’ll explain below.
I bought DDD shares heavily last week and now have the largest position in 3D Systems since I first discovered and invested in the company in late 2010. While I always endeavor to be ahead of the market and love “bottom fishing”, I won’t fight the market either. I’ve set a 7% stop-loss order for capital preservation in case I’m wrong and weakness continues.
3D Systems shares oversold, overshorted, and overhated
Shares in DDD are down some 63% YTD with acceleration (33% decline) of that loss made in just the last 2 months. The Williams %R has bounced between -90 to -100 in the last two weeks, indicating deeply oversold conditions. Of course the Williams %R indicator isn’t perfect and a stock can continue a strong downtrend while remaining oversold for many, many months…which is why my stop-loss is in place.
36.6 million DDD shares are sold short- a whopping 38% of the float. My belief is the Q3 miss has been priced in and this level of short shares is a contrarian indicator.
The level of unrealistic expectations and media hype that drove 3D printing stocks to their highs last year has now been equaled by negativity to the downside.
3D Systems is the favorite target of shorts, with negative articles by short sellers published almost daily on SeekingAlpha.
In an article on TheStreet.com last week, “Why the 3D Printing Hype Is Still Not Matching the Reality”, the author opined:
Stories about how biotech firms are using 3D printers to create replacement body parts are frequent fodder for Web news sites and give the unaware the idea that the 3D printer for sale at Staples or Amazon will have somewhat similar capabilities.
This is every bit as ridiculous as the headlines from a year ago that claimed “You can now 3D print anything you want!”, only it’s at the other end of the spectrum. Would anyone buying a 3D printer at Staples think for even a moment that their new 3D printer will have “somewhat similar capabilities” as bioprinting human organs?
Negativity and fear surrounding pure play 3D printing stocks and 3D Systems in particular is now at the highest point I’ve ever seen it. This is quite a change from the frenzied, parabolic rides that were fueled by media hype last year.
Warren Buffett famously said he made his money by being fearful when others are greedy and being greedy when others are fearful. Given the fear of longs (and some outright loathing by short sellers) surrounding 3D printing in general and shares of 3D Systems more specifically, I believe now is the time to get greedy.
Q3 shortfall a capacity, not demand issue
An earnings miss due to declining demand is one thing. A miss primarily due to capacity constraints is another, and that’s what the 3D Systems Q3 basically boiled down to. When production can’t meet demand and you have the cash and ability to quickly rectify the situation, it’s more than likely a boon for the coming quarter(s).
As of September 30, 2014 order backlog was $46.0 million. This compares to backlogs of $28.6 million at December 31, 2013 and $14.4 million for Q3 2013. Much of the Q3 backlog should be realized in Q4, as the company has since added a second direct metal 3D printers’ manufacturing line to meet demand.
Regarding the capacity issue, CEO Avi Reichental explained:
“Now that we are ramping up production in a second direct metals facility, we expect to be able to meet this rising demand during the fourth quarter and beyond.”
The Q3 shortfall was also related to a decision to delay launch of some products at the consumer grade. This has been rectified as well. Damon Gregoire, SVP and CVO commented:
“Our decision to delay our latest consumer products decreased our consumer growth rate by 43% compared to last year’s third quarter. Now that we have begun shipping our latest consumer products we expect this category to contribute favorably and return to more healthy organic growth rates over the next periods.”
Hewlett-Packard’s entry into 3D printing is now scheduled the second half of 2016 (or later?)
HP’s CEO, Meg Whitman, remarked in October 2013 that “3D printers are like watching ice melt.” Following that attention-grabbing statement the official announcement of HP’s entry into 3D printing was twice delayed… along with the launch of their enterprise level Multi Jet Fusion 3D printer. HP’s printer launch has been pushed back…way back… and is (at least for now) scheduled for the second half of 2016. Even then, HP’s 3D printer will only print in plastic.
How long will it take before HP might enter the high-growth metals 3D printing space to potentially wrestle some market share from 3D Systems and other players? Given the fact that ice melts at faster speeds than HP has been able to launch their (plastics only) printer, not anytime soon. While HP’s 3D printer speeds are projected to be some 10X faster than what was available a year ago, printing speeds and print quality continue to improve industry-wide. In “technology time”, from now until the second half of 2016 is an eternity and 10X faster speeds may not be very remarkable by then. So I think it’s far too soon to predict the impact HP may have on 3D Systems or other players, other than to remind investors that HP’s launch is a long way off and every company in the industry is increasing printing speed and print quality with each new iteration of their machines.
Take a Prodways D35 3D printer (pictured at left) for example. This printer is capable of manufacturing (not just prototyping) jewelry pendants of 2.5 cm in under 11 seconds per unit according to a press release last week from parent company Groupe Gorge. My guess is that’s at least 10X faster than “watching ice melt”…and the D35 printer isn’t limited to plastic.
Closer to home, 3D Systems is developing a system for manufacturing Google’s Project Ara smartphone components that will no doubt set both production volume and production speed records.
3D printers typically use a moving printhead on a stationary bed. The 3D Systems high-speed continuous fab-grade printer system puts the print bed in motion on a track system under a set of stationary printheads. The result is a 3D printing assembly line with multiple products printing at once, each unique, in full color and multi materials.
Production speeds of 50X current technology are expected be achieved by 3D Systems in 2015 with this system.
Perhaps more importantly, this system can be utilized in multiple applications.
CEO Avi Reichental explains:
“We believe that this high-speed continuous 3D printing platform and polymers would have wide applications into a variety of both industrial and consumer goods type manufacturing applications.”
“We expect to be able to apply the benefits of these developments into many, many other industrial and consumer goods applications.”
Increasing medical/healthcare industry focus
3D systems is making strong inroads into the medical industry via acquisitions and new product offerings.
- This year’s acquisition of Medical Modeling brings proprietary virtual surgical planning and medical device 3D printing expertise
- The acquisition of Belgium’s LayerWise also expands capabilities in medical and dental direct metal 3D printed devices and implants
- The Simbionix acquisition is also noteworthy as a leading provider of 3-D virtual reality robotics-based surgical simulation and training products
The increasing strength of 3D Systems in the medical/healthcare industry is a major reason to like the stock here.
In August, Gartner released their 2014 outlook for 3D printing and medical/healthcare applications are predicted to be among the first to achieve broad-based, global adoption “within 2-5 years.”
IDTechEx researchers also conclude that “The medical/dental sector has strong growth potential. Currently forecast at $186M for 2014, it will grow to $868M by 2025 led by dental applications and increasing use for the manufacture of orthopaedic implants.”
I read what the analysts say carefully. Then I do the opposite.
In November-December of 2013 most analysts from the big firms had “outperform”, “buy”, or “strong buy” ratings on 3D Systems when the stock was at $70+/share. Many of those same firms are now saying you should sell in the $30/share range. Out of 23 firms, 61% now have a “hold”, “underperform”, or “sell” recommendation on the stock according to Thomson/First Call.
I did not load up on 3D Systems at $70+ last year. Instead, I introduced Groupe Gorge to subscribers on 11/29/13 and after more due diligence called it “The Best 3D Printing Stock to Buy Now” on 12/9/13. The chart below tells the rest of the story.
So I’m not listening (again) to the majority of analysts. I bought 3D Systems with both hands last week, even as the stock continued to make new 52 week lows.
Insider buying last week
Company insider Walter Lowenbaum isn’t listening to analysts either. He bought over $880,000 worth of shares in the open market last week (Form 4).
Now there are many reasons why insiders might sell shares of their stock- and sometimes it has nothing to do with their personal view of the company’s future. That said, there is only one reason for insiders to buy shares in the open market…because they believe the stock is undervalued. There’s also “token gesture” insider buying vs. meaningful position buying, with this level of investment obviously being the latter.
Due to the above, I’m confident that shares of DDD are now undervalued and poised to move higher. Being confident and being right are two different things however. Unforeseen factors such as a broad market correction or the potential effect of tax-loss selling as the year winds down are impossible to predict, underscoring the importance of stop-loss orders.
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Disclosure: I am long shares of DDD. I was not paid by any company or third party for this article.
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