Don't be Afraid of Shorting 3D Systems and Stratasys

Earlier this week, I penned down an article anticipating 3D Systems’ (DDD) big earnings and revenue miss. The company released its Q3 results yesterday and my doubts were proved correct as the company’s revenue and earnings well below the Street’s estimates. The company reported earnings of $0.01 per share on revenues of $151 million. The bottom-line was $0.06 below the consensus target while a 9% dip in sales led to a huge miss of roughly $30 million.

For a company which was supposed to revolutionize the traditional process of manufacturing, the slowdown in revenue is a big red flag.

However, the Street differed with my opinion as the stock jumped 10% yesterday after falling 5% before the opening bell. Turns out, investors believed that the earnings miss was already priced in the stock, and shorts booking profits led to the 10% rise. Despite the short squeeze, I think investors should continue shorting the stock as it has more downside potential. The earnings report was terrible and even if the bad news was already priced in, the falling revenues don’t paint a good picture of the company’s future.

Moreover, as described in my previous article, 3D Systems’ earnings will take a hit due to the goodwill write-offs of the 50+ acquisitions that the company has completed in the last two and a half years. According to statistics, roughly 50% of M&A deals end up as a failure. So, given the uselessness of 3D printing technology and the complications of integrating 50+ companies into 3D Systems’ core business, I think the goodwill write-offs pose a massive threat.

Although 3D Systems has managed to remain profitable, the company’s earnings are already in a free fall. Throw into that the cost involving goodwill write-offs and you have a grim picture of the company’s future. The expiry of many 3D printing patents has greatly reduced the entry-barriers. As a result, many companies are expected to enter the “apparently booming” market, the most popular being Hewlett-Packard (HPQ).

The 3D printing industry is worth under $10 billion as of now and given the amount of companies that have or are about to enter the market, I think 3D Systems, along with other companies like Stratasys (SSYS), Voxeljet (VJET), and ExOne (XONE) will struggle to sustain their present valuation.

Stratasys is treading down the same path as the company also missed on earnings and revenue. The company’s slowing growth and inability to generate huge profits has taken a toll on the stock. Despite the earnings miss Stratasys, like 3D Systems, ended the day in the green zone.

Conclusion

Regardless of the short squeeze, I think investors should continue betting against both 3D Systems and Stratasys. Both the stocks have reported terrible earnings that paint a grim picture of their future prospects. The stocks may have risen considerably following the earnings release, but I think they still possess massive downside potential. Hence, I think investors should short 3D Systems and Stratasys.