Name That Trade $DDD: Coiled Spring or Kitchen Sink?

by Dan November 7, 2014 1:19 pm • Commentary

Regular readers know that we have not been fans of 3d printing stocks for the past year, despite our belief that the technology will be transformative for consumers and businesses in the decades to come.  The stocks were in all out Mania mode for the better part of last year and into early 2014, but it was the first high valuation/growth sector in the market to crack, and looks like it may be the last to rally.  Just this week, the relative strength leader in the space, Stratsys Systems, missed and guided down, sending its shares down 16% on the week, but only 25% from the 52 week highs.  ONLY? Because then there is 3D Systems (DDD), that is down 65% from the all time high made in early January, placing the stock down 63% on the year.

On October 22nd, DDD pre-announced their Q3 and guided the full year below consensus, sending the shares down 15% the following day, and now down 20% in total since.  DDD management cited capacity constraints on manufacturing certain business and consumer printers.  The stock that was once impervious to bad news has barely seen an uptick in 2014.  Even with the stock’s dramatic decline, the shares remain very expensive at 33x expected 2015 earnings that analysts see growing 43% after this year’s expected 14% yoy decline.  Despite expected sales increases of 30% for the next few years, analysts see declining margins from last year’s 52% as competition from larger players is expected to heat up.

Although it’s a hard way to make a living pressing a short down 65% with short interest of 33%, the one year chart below shows the evidence of the market reality that just as stocks can overshoot on the upside, they can do so on the downside, and this has been a great press as a short.  Conversely, trying to pick a bottom has been a fools errand.  It may still be so, as the company could kitchen sink 2015 guidance on Monday morning’s Q3 earnings call in an effort to set the stage for a series of beats.

DDD 1yr chart from Bloomberg
DDD 1yr chart from Bloomberg

The options market is implying about a 6.5% one day move, which seems fairly tame given the ytd price action, but basically inline with the 4 qtr average.  It is important to note that the company has a history of pre-announcments, and like the Oct 22nd move, it is not reflected in their actual announcements.

Gun to my head I play for a short squeeze, but the news seems to be bad and not showing signs of getting better. Investors are digesting HPQ’s recent announcement to enter the space, coupled with competitors SSYS and XONE missing and guiding down.  So I have absolutely NO fundamental reason to take shot on the long side aside from utterly horrible SENTIMENT.

Prices for options have declined a bit since the pre-announcement, but still remain elevated in the low 50s:

DDD 1yr chart 30 day at the money IV from Bloomberg
DDD 1yr chart 30 day at the money IV from Bloomberg

High IV makes directional trades fairly tough, meaning, you really need to get direction right, or your short dated event trade has high probability of being total loss.  

If I were inclined to play LONG, I would probably just buy the Nov 14th weekly 35 calls for $1.20 (stock reference $34.55), break-even would be $36.20, up about 5%.

If I were inclined to play for a sort of death spiral its really tough, puts look very expensive and there are few put spreads that look attractive.  The Nov 14th 34/30 put spread for about $1 (stock ref $34.50) probably looks the best, but not that great with break-even down ar $33.

As you can tell we have no conviction causing us to trade, but we thought we would lay out a couple ways to play.