What: Coming on the heels of Monday's strong performance, shares of 3D Systems (NYSE:DDD) traded notably lower on Tuesday after four Wall Street firms weighed in on its fourth-quarter earnings released yesterday. At its lowest point during the morning trading session, the stock traded nearly 15% lower, while rival Stratasys (NASDAQ:SSYS) traded almost 10% lower.
So what: Two Wall Street firms downgraded 3D Systems and two maintained their neutral stance.
JP Morgan's Paul Coster downgraded 3D Systems from neutral to underweight and lowered its price target $1 to $9, noting that investors may be "pricing in unrealistic expectations of a V-shaped recovery." Coster also thinks that 3D Systems' recent surge in shares, which are about 45% higher in the last month, appears excessive compared to the continued uncertainty the industry faces.
The other downgrade came from Gabelli & Co.'s Hendi Susanto, who noted that "... global macroeconomic challenges, weak investment in capital equipment, the negative impact of excess system capacity, longer sales cycle and low market visibility may result in negative sales performance in 2016."
Finally, Jefferies and Goldman Sachs reiterated their neutral views on 3D Systems and maintained their respective price targets of $13 and $10.
Now what: After a dismal 2015, 3D Systems and Stratasys are both about 45% higher in the last month after their earnings suggested that the worst of the customer demand slowdown they've experienced throughout 2015 may be over.
However, whenever a stock moves sharply higher or lower in a short period of time, it runs the risk of becoming disconnected from the underlying business fundamentals that drive longer-term returns. The risk is that 3D Systems' and Stratasys' underlying businesses aren't keeping up with the pace of their stock prices, which can create a low margin of safety for investors.
On one hand, it isn't likely that business is 45% better for 3D Systems and Stratasys in the last month. On the other, it's possible that the market was being overly pessimistic toward the sector before this rally. It could also be a combination of the two -- business has improved some and investors were being a little too harsh.
Ultimately, fundamentals will tell the true story with future earnings. In the meantime, 3D Systems and Stratasys are likely to be a volatile pair as investors continue pondering these questions.