by John Jagerson | September 12, 2013 8:32 am
The accelerating pace of growth of 3D printing technologies, and the enticing future that these technologies may hold have not gone unnoticed by investors. Several of the key players in the industry, like Exone (XONE), Stratasys (SSYS) and 3D Systems (DDD) have seen major runs over the last two years and have led to rich valuations.
As Kenneth Wong, an analyst at Citi who recently initiated coverage of 3D printing leaders DDD and SSYS, asked: will the technology catch on like VCRs or go the way of Segways?
Do investors of 3D printing companies have eyes bigger than their stomachs? Or is this industry in the nascent stages of what will turn out to be a revolutionizing technology?
To date, 3D printing technology has advanced the way most new technologies do, with highly specialized and limited applications for commercial or private end users who can afford the high costs associated with adoption of cutting edge technologies. But will it expand into the mainstream?
The 3D printing market has grown by 25%-30% each year since 2010 and is expected to triple by 2015. DDD, one of the leading providers in the $2 billion 3D printing market, is well positioned to benefit from this growth, having one of the broadest product lines in the industry and an optimal revenue mix coming from higher margin printing materials as well as system sales. They are also one of the oldest names in the space, founded in 1986, only two years after the very beginnings of 3D printing technology. With one of the widest customer bases in the industry, DDD provides solutions for the automotive, aerospace, healthcare, energy, education, and electronic and computer industries.
However, the promise of 3D printing possibilities is also being baked into the stock price. At 121x TTM P/E and an expected 44x forward P/E, DDD is performing with a lot of expectations for its future hanging around its neck.
After suffering through a rough start to 2013, DDD rebounded aggressively and, since May, has essentially channeled sideways, finding strong resistance at $50 – 51. This overall price behavior, however, formed an ascending triangle, an uptrending continuation pattern of which it recently broke out. Although it didn’t move the stock tremendously, the breakout was accompanied by heavy volume. It has started to pull back somewhat and, for momentum traders, a retracement back to the $50 level (previous resistance) is a good entry point to test.
It has already started to break out, so a minimum price target should be about $55 given the size of the consolidating channel, although the potential could be higher, especially if the broad market stays bullish over the next few weeks. A drop below $46, the previous low, would confirm the failure of the breakout move so consider using that price as a guideline for a stop level.
DDD has seen a consistent trendline since the start of 2012. It has tended to not deviate terribly from the trendline with the exception of the strong run-up and subsequent sell-off in the first four months of 2013. However, this round-trip showed the strength of the long term trend since both moves, although powerful at the time, regressed quickly back to the trendline and after deviating away from it to roughly the same magnitude.
For investors with a very long term time horizon who want exposure to the potential of the industry and have the tolerance to ride out volatility, but who also do not want to give up all forms of risk management, this trendline can serve as a useful guide to determine how much of a drawdown is acceptable before cutting losses.
As presently valued, DDD is expensive. If the growth of 3D printing fails to live up to expectations, even if that growth remains appreciable, the stock could languish and see a substantial chunk of its multiple contract over time. However, a big part of any emerging technology such as 3D printing is the component of surprise: how the technology may transform certain industries, manufacturing methods, or consumer habits that are now unforeseeable.
Consulting firm McKinsey & Co named 3D printing one of its 12 most disruptive technologies by 2025. That is definitely a long way off, but 3D printing nonetheless holds this potential to revolutionize design and production, drastically change product distribution, create entirely new product categories, and alter patterns of consumption.
Recommendation: We recommend an entry to DDD as the bounce off $50 per share develops. Use a short term target of $55 per share. If momentum holds we could easily see prices above $60. However, we see this as a short term play for 10%-15% upside and should be kept on a short leash.
Options Alternative: This is a situation where a short term call option may actually be the preferable strategy. For traders looking for a little additional leverage we recommend the out of the money DDD October 60 calls.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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