Name That Trade – $DDD: Beggin’ for Another Piece of That Bubble

by Dan February 25, 2015 11:21 am • Commentary

3D Systems reports their Q4 results tomorrow morning before the opening. The options market is implying about an 8.5% one day move* which is rich to the 4 qtr avg of about 7% and the 8qtr avg of about 6.5%.

The Febth 27th weekly straddle (long the call and the put) is offered at $2.50 with stock at $30, if you bought that you would need a move above $32.50 or below $27.50 by Friday’s close to break even.

DDD is down 62% from its 52 week highs, with short interest at 35%, and given competitor Stratasys (DDD) Feb 3rd one day decline of 26% (was down 35% at its lows) following an earnings pre-announcement, the implied move looks fair (I guess?). 

3D printing stocks were most definitely a bubble in early 2014, and to be honest, the bursting of that bubble over the last year was actually a very positive thing for the bull market.

Growth investors who were enamored with the space in 2014 (when these stocks traded at 20x expected sales) now have to figure out whether or not these companies (with far lower expectations) still have a place at the table when the promise of 3d printing in the home and in industry becomes ubiquitous.  I have no idea whether these are the players for the next decade or whether it is some yet to be formed start-up in Silicon Valley or Israel, or if it is an existing large tech or industrial company that figures it out on their own.

Despite volatile earnings for companies like DDD (which I guess is to be expected), it is important to note that they been growing sales at 45% a year since 2010, and what investors seemed to be concerned with is the pace of future sales growth (30%).

Valuation was clearly a sticking point for many in 2014, but the earnings multiple on expected 2015 earnings of 30, and trading at a little less than 4x expected 2015 sales, they are not crazy any longer. That is ONLY IF the company can achieve current consensus estimates for a growth stock that could be in the infancy of a secular trend in manufacturing.

As for the technical set up, the stock is clearly oversold, but could the stock’s recent consolidation in and around $30 in the face of bad news in the space demonstrate a level of relative strength?

[caption id="attachment_51325" align="aligncenter" width="600"]DDD 1yr chart from Bloomberg DDD 1yr chart from Bloomberg[/caption]

On a longer term basis though it is fairly evident that there is NO near term technical support until the low $20s:

[caption id="attachment_51326" align="aligncenter" width="600"]DDD 5yr chart from Bloomberg DDD 5yr chart from Bloomberg[/caption]

Potential Trades Depending On Ones Directional Inclination:

Bullish: If you believe that a lot of the bad news is in the stock, and that the combination of massive short interest, decent recent relative strength (flat-lined at $30 for nearly 3 months) and extremely poor sentiment could be the catalyst for an epic short squeeze on the slightest bit of good news on tomorrow’s call, then merely buying the Feb27th 30 calls for $1.35 (stock ref $30.20) is the way to play. Offering a break-even up at $31.35, up 4% with max risk of $1.35.


Bearish: If you are of the belief that the stock’s inability to participate with the broader tech rally suggests that we will see lower lows, and possibly a massive breakdown like we saw a few weeks ago in SSYS then tomorrow morning’s forward guidance should serve as the near term catalyst. Buying the Feb27th weekly 30 puts for $1.15 (stock ref $30.20) is the way to play. Offering a break-even down at $28.85, down about 4%, with a max risk of $1.15.

RATIONALE: SO YOU PROBABLY SAW WHAT I DID THERE.  I tore apart the weekly at the money straddle, and for those with a directional bias, the weekly options on their own, despite being expensive in vol terms seem dollar cheap.  But here is the thing for those punters out there, it’s important to consider just how hard it can be to make money with long premium directional plays into potentially volatile events with stocks that have high levels of implied volatility. There are a lot of things you have to get right, first and foremost direction, timing and magnitude of the move.