New Trade $DDD: Printer Jam

by Dan December 18, 2013 3:41 pm • Commentary

A couple weeks ago Enis took a Deep Dive on DDD (below), and after taking a hard look at the company, the existing fundamentals, the stock’s valuation and the sentiment concerning the entire space, he was just a tad skeptical.  There is no doubt that 3D printing companies are here to stay, but it is also clear that the recent enthusiasm about the stocks resembles a bit of a mania.   Remember these are hardware companies, and the largest of which, DDD, sports an $8.3 billion market cap on sales of only $500 million.  If 2013 has demonstrated time and time again, traders trying to short stocks solely based on valuation have had their faces ripped off (see TSLA, SCTY, FB & TWTR), but as we head into year end, I am not certain that the speculative nature of much of this year’s gains in equities will be a solid investment thesis for 2014 as global markets appear to be focused on less accommodative Fed monetary policy and reliant on the reflation of global growth.  

Momentum stocks in the web space, solar and TSLA that lack profits, yet sport sky-high valuations have hit a bit of a snag in the last few months.  Only a few of them have confirmed the new highs made in the last couple weeks in all the major indices.  My sense would be that investors look to lock in gains in speculative names and rotate into more cyclical, yet reasonably priced stocks in the New Year.

I want to make a near term bearish play, with defined risk, that DDD will follow the recent action of stocks like TSLA, P, SCTY and LNKD and retrace a healthy bit of the year to day move.

TRADE: DDD ($81.75) Bought Jan18th expiry 80/70/60 Put Butterfly for 2.20

-Bought 1 Jan18th 80 Put for 4.10

-Sold 2 Jan18th 70 Puts at 1.10 each or 2.20 total

-Bought 1 Jan18th 60 Put for .30

Break-Even on Jan 18th, 2014 expiration:

Profits: btwn 77.80 and 62.20 of up to 7.80, max gain of 7.80 at 70

Losses: btwn 60 and 62.20 losses of up to 2.20, btwn 77.80 and 80 losses of up to 2.20, max loss of 2.20 above 80 and below 60

Trade Rationale:  We chose our strikes based on the technical target of 70, which is the confluence of the rising 50 day ma as well as a good amount of prior action that took place there this fall:

[caption id="attachment_33960" align="alignnone" width="600"]DDD daily, 50 day ma in pink, Courtesy of Bloomberg DDD daily, 50 day ma in pink, Courtesy of Bloomberg[/caption]

The stock has rallied back to its recent high, which we view as a good spot to give this entry a shot.






Original Post Dec 3rd, 2013:  Deep Dive – $DDD 

I discussed the huge run for 3-D stocks in 2013 in the CotD post last week:

We have followed the sector from afar, fascinated by the price action and the macro story more than anything else.  We plan on digging into the fundamentals of the individual companies in the coming months in order to sort out which of these companies are most likely to be the major long-term winners.  As always, to the winners go the spoils.

As promised, today is our first Deep Dive into the largest stock in the sector – 3D Systems.

DDD, the largest market cap stock in the space (over $7 billion).  The stock really got going at the start of 2012, and has traded above its rising 200 day moving average for almost the entire period since:

DDD daily chart, 200 day ma in black, Courtesy of Bloomberg
DDD daily chart, 200 day ma in black, Courtesy of Bloomberg

DDD was founded in 1986, and went public in 1989.  The stock was essentially flat between 1991 and 2010.  While the company was a pioneer in 3-D printing technology (led by founder Chuck Hall), the technology was only of limited commercial use until the past few years.  Hence the recent excitement surrounding DDD and the sector as a whole.

3-D Systems gets about 60% of it revenues from the U.S.  Summarized financial information concerning the Company’s geographical operations is shown in the following tables, from the company’s most recent 10-Q:  


  Quarter Ended September 30, Nine Months Ended September 30,
(in thousands) 2013 2012 2013 2012
Revenue from unaffiliated customers:
United States $













Other Europe





Asia Pacific





Total $









The Company’s revenue from unaffiliated customers by type was as follows:

  Quarter Ended September 30, Nine Months Ended September 30,
(in thousands) 2013 2012 2013 2012
Printers and other products $


















Total revenue $









Perhaps what surprised me the most as I read through the company’s financial statements was the diversity of DDD’s product lines.  The company clearly aspires to be a one-stop shop for any of your 3-D printing needs.  In the most recent quarter, it acquired a company involved in direct metal 3-D printing, a company offering a cloud-based, collaborative design and project management platform, and a company involved in custom 3-D designs of cakes and sugar products (such as wedding cakes).

Its consumer solutions segment has been one of the fastest growing over the pas year, going from 3.3% of revenues a year ago to almost 10% of revenues today.  Short description:

Consumer solutions revenue includes sales of Cube® and Cube XTM consumer 3D printers and their related print materials and other products and services.

The expansion of the consumer segment dovetails with a broader theme for DDD management – shifting 3-D printing from a niche audience to a mass market audience.  Management specifically outlines this goal:

The increase in printer revenue is consistent with our ongoing plan to accelerate printer adoption in the marketplace by introducing lower priced printers, expanded capabilities and increased printing speeds.

More importantly, its acquisitions and its operating results speak to this goal.  Sales trends are rapidly moving towards smaller, lower-priced 3-D printers that sell in much higher volumes than the larger, high-priced printers that used to make up a much larger proportion of DDD’s overall sales.  Whereas a few big sales used to dictate DDD’s overall quarterly results, the company’s diversification and mass market expansion has led to less dependence on a just a few orders.  Wikipedia (of all places) does a great job summarizing this strategy:

As part of 3D Systems’ effort to consolidate 3D printing under one logo, its products span a range of 3D printers and print products to target all potential consumers of its technologies. The three branches of printers offered by 3D Systems are personal, professional, and production. Though production-grade printers formed the early backbone of the company, 3D Systems’ extension to professional and personal printers follows the company’s reported desire to “level the playing field” in manufacturing and open up access to the resources that have traditionally been reserved for deep-pocketed companies.[10] In addition to printers, 3D Systems offers content creation software to consumers unversed in CAD, with the expressed hope of making content creation “as simple and intuitive as a video game.”[11] Following a razors and blades business model, 3D Systems offers more than one hundred materials to be used with its printers, including waxes, rubber-like materials, metals, composites, plastics and nylons.

As Wikipedia notes, management is following the razor and blades business model.  The increased overall user base helps the company expand its customer base for its printer materials and services offerings too.  3D Systems has much higher margins selling printer materials rather than the actual printers, similar to the old Hewlett-Packard model, where the printer is cheap, but the ink is very expensive.  Though not quite as extreme as the old HP model, here is the margin difference for DDD:

Table 3 sets forth gross profit and gross profit margins for our products and services for the third quarters of 2013 and 2012:


Table 3

  Quarter Ended September 30,
  2013 2012
(Dollars in thousands) Gross Profit Gross Profit Margin Gross Profit Gross Profit Margin
Printers and other products $



% $



Print materials










Total $



% $




Print materials have over 70% gross margins, vs. 45% for actual printers.

Overall, I really like management’s strategy, the secular trends behind DDD’s business, and the execution over the past couple years.  However, what concerns me about buying the stock here is that the appreciation over the past year has been driven almost entirely by multiple expansion.  Earnings growth is only 17% year-over-year, while the stock is up more than 100%.  Here is the P/E multiple over the past 3 years:

[caption id="attachment_33258" align="alignnone" width="503"]DDD 12 month trailing P/E, Courtesy of Bloomberg DDD 12 month trailing P/E, Courtesy of Bloomberg[/caption]

Analysts are projecting 25-35% earnings growth over the next 3 years, but the stock’s multiple is significantly higher than companies with comparable growth rates.  There is some premium for the exceptional nature of DDD’s sector, but over 100x is too high in my view.

One potential reason for the stock’s 50% advance since early October is that short interest has remained stubbornly high in 2013:

[caption id="attachment_33259" align="alignnone" width="600"]DDD short interest, Courtesy of Bloomberg DDD short interest, Courtesy of Bloomberg[/caption]

The most recent number was almost 20m shares short, or about 21% of the float.  That’s near the lowest level of 2013, but still quite elevated.  I’m guessing a portion of the stock’s recent move was many shorts finally giving up.

I like the long-term story for DDD as a company, but I am steering clear of DDD the stock unless it declines to around the $40-$50 area at some point.  In that price range, I would become much more interested, since DDD clearly has its sights set on becoming the one-stop-shop leader for 3-D printing.