By now you've heard the news: 3D Systems (DDD +1.46%) beat expectations in its fourth-quarter earnings report Monday, sending the shares up 25%. But here's the thing: JPMorgan saw that same news yesterday, and they've come back to market today to say that they're not impressed.
Not one little bit.
The news
In yesterday's announcement, 3D Systems reported earning $0.19 per share in pro forma profits despite experiencing a 2% decline in revenue year over year. Revenue did climb sequentially, however, rising 21% between Q3 and Q4 of 2015. That news, combined with the surprisingly strong pro forma profit, frightened a lot of short-sellers out of the stock, forcing them to buy 3D shares in large numbers to cover their short positions, and sending the stock higher in consequence.
So far, so good. Now let's look at three reasons that JPMorgan (and Gabelli as well -- because according to TheFly.com, both these analysts downgraded the stock today) think that this story is not as good as it looks.
3Dl printers from 3D Systems are a bit bigger than your average printer. Image source: 3D Systems.
Thing No. 1: Pro forma profits are not profits at all
According to StreetInsider's write-up of JPMorgan's downgrade, investors are looking at 3D's results and seeing in them a promise "of a V-shaped recovery." But if you look closely at the news, the "V" looks a whole lot more like an "L".
Take profits for example. 3D Systems makes much of the fact that it earned $0.19 pro forma. But in fact, because 3D took a big writedown on the value of its consumer products business, the GAAP results for the quarter were actually a loss -- and not a small loss either, but $5.32 per share. And for the full year, 3D Systems lost $5.85 per share.
Now, maybe this is a one-time event, but 3D declined to give guidance for the rest of 2016. So the truth is that we really don't know that things are going to "V" back up this year. Indeed, according to JPMorgan, 3D expects that revenues this year will be at best "flat to slightly up." And that would look a whole lot more like an "L" than a "V."
Thing No. 2: Investors misread the news
JPMorgan believes that investors jumped the gun in assuming things are all better now at 3D Systems, that profits have returned, and that the stock will continue to rise. Warns the analyst: "the stock overreacted positively yesterday," and more generally, "we think the stock's ~68% YTD performance ... is a bit excessive given no clear signal end market demand is sharply rebounding."
As a corollary, JPMorgan points out that the 4% price spike at 3D rival Stratasys (SSYS 3.91%) yesterday, in sympathy to the 3D news, is unrealistic. And while the analyst didn't directly single out ExOne (XONE +0.00%) as well, the fact that ExOne stock rose 10% on 3D's news suggests that that one was an overreaction as well. (In fact, the only news out of ExOne yesterday, actually released by the company itself, was that ExOne has postponed the release of its own financial report for 2015.)
Thing No. 3: This is a short squeeze, plain and simple
The upshot of all this, in JPMorgan's estimation, is that Monday was nothing more than a case study in how a short squeeze works.
While 3D Systems beat estimates, the 25% spike in share price on news of a huge GAAP loss came about "primarily" because investors "overreacted" to news that wasn't as good as it sounded. While it's possible that things will turn around at 3D Systems, and even at rivals Stratasys and ExOne, and that such a turnaround will make the stocks more valuable than they were last week, the sharp increase in the stock prices Monday means there's now "minimal margin for error for this execution story."
In short: Any increase in stock price that might have been justified at these stocks has already happened -- and there's no profit left to be had. Accordingly, JPMorgan has downgraded 3D stock to underweight.
And one more thing...
Coming from any other analyst, writing about any other stock, this might all sound like sour grapes. After all, heading into earnings JPMorgan had only a neutral rating on 3D Systems stock, and thus missed out on the big bounce Monday. Frustration over that fact would only be natural.
And yet, JPMorgan isn't the only analyst downgrading 3D Systems today. Gabelli cut the stock, too -- and Gabelli had hung a buy rating on 3D going into earnings.
The fact that this former bull is now less enthusiastic about 3D suggests there's more than just sour grapes at work here. When both JPMorgan and Gabelli tell you that 3D Systems costs too much, that there's no visibility on where the stock is heading in 2016, and that expectations are "low" -- there just might be something to worry about.
And when you look around the industry and see that 3D Systems is losing money, Stratasys is losing money, and ExOne is losing money as well?
I fear it's not just 3D Systems investors who have reason to worry.
