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Chart Pattern Projects This 3D Printing Stock Could Soar 55% by Year-End
3D printers are little machines, but they're making a big impact. Some analysts even speculate they could soon change the way copying is done.
3D printers use special material to "print" physical, three-dimensional objects. Just as traditional printers use ink to create words on a page, 3D printers use tiny strips of plastic and other materials to build actual, hand-held objects.
Manufacturers like Ford (NYSE: F) and General Electric (NYSE: GE) already use 3D printing technology to recreate engine parts. Scientists presently use the printers to model body parts. Even NASA plans to ship a 3D printer into space so astronauts can print replacement space parts in orbit.
According to Forbes, the 3D printing industry will be worth $3.1 billion by 2016, and that number is estimated to jump to $5.2 billion by 2020. This outlook makes trading 3D printing stocks potentially profitable trades.
Currently, there are three major publicly traded 3D printing companies: Stratasys (NASDAQ: SSYS) and ExOne (NASDAQ: XONE), which primarily target the industrial 3D printing market, and 3D Systems (NYSE: DDD), which targets consumers.
Of these companies, Stratasys is my current favorite. The company sports a bullish technical and fundamental outlook, is strategically positioned and is aggressively trying to increase market share.
In 2012, SSYS purchased industrial 3D printing firm Object for $1.4 billion. This June 17 trading week, the company announced the acquisition of privately held, consumer-oriented 3D printing company, MakerBot, in a stock-for-stock transaction worth $403 million.
Investment firm William Blair estimates MakerBot currently controls over 20% of the consumer/hobbyist 3D printing market. The MarketBot acquisition should strengthen Stratasys' ability to tap the consumer market.
SSYS is also a leader in 3D printing materials, having the widest range of materials available. Recently, the company won an award for a patent-pending technology that makes it possible to print mechanical, electrical and optical components out of the same material.
As 3D printing technology evolves, the ability to print objects out of materials like metals, plastics and wood will likely be critical. SSYS already has a leg up and can emerge as the technological leader.
Shareholders certainly seem to believe in the company's growth potential.
Since beginning a major uptrend from the October 2011 low of $17.88, shares have risen more than 350%.
In early 2013, the stock hit an all-time high at $92.30. However, unable to maintain that peak, SSYS sank to a low of $60.20 by late February. Shares found support there, and I have used that as the second point for my major uptrend line.
Through most of March and early April, shares hovered between $74.54 -- an important support level -- and $79.25, which became resistance. In mid-April, the stock broke $79.25 resistance and surged to a new all-time high of $94.90 in May. Technically, a cup-and-handle pattern appears to have formed as shown by the dotted black line on the chart.
The top of the U-shaped cup is marked by $94.90 resistance while the bottom of the cup is $60.20 support. The handle of the cup formed during the month of May as the stock dropped from its $94.90 high to a low of $74.54.
If shares can penetrate $94.90 resistance, the stock could soar since there wouldn't be any historical resistance in sight. According to the measuring principle for a cup and handle pattern, calculated by adding the height of the cup to the breakout level, shares could potentially reach a new high of $129.60 ($94.90-$60.20 = $34.70; $34.70+$94.90 = $129.60). At current levels, this target represents 55% potential returns.
The bullish technical outlook is supported by strong fundamentals.
For the upcoming second quarter, scheduled to reported on July 29, analysts expect increased demand for 3D printed objects will push revenue up 112.5% to $105 million compared to $49.4 million in the year-earlier quarter. The outlook is equally bright for the full 2013 year. Analysts estimate revenue will surge almost 103% to $436.3 million from $215.2 million last year.
The earnings outlook is similarly solid. For the upcoming quarter, analysts expect earnings to rise 37.5% to $0.44 per share from $0.32 in the comparable year-earlier quarter. For the full 2013 year, analysts expect earnings to increase 28% to $1.91 per share from $1.49 last year.
In addition to a strong fundamental outlook, the company has nearly $141 million in total cash and no long-term debt. This strong financial position could help SSYS acquire other companies in the 3D printing industry.
Risks to consider: The 3D printing industry is highly competitive. Stratasys will need to continue developing new printing technologies and materials. However, the recent MakerBot acquisition should help the company tap a wider consumer base.
Given the recent sharp drop in the market, I am going to trade SSYS very cautiously. Buy the stock only if it conquers round number resistance at $100 and penetrates $101. I suggest a buy stop order valid until Aug. 2. After you purchase it, set a stop-loss at $89.90, which should then be current support (old resistance should become new support).
Recommended Trade Setup:
-- Buy SSYS on a break above $101 by Aug. 2
-- Set stop-loss at $89.90, slightly below what will then be support
-- Set price target at $129.60 for a potential 28% gain by late 2013