Over the past several weeks, shares of 3D printer Stratasys Ltd. (NASDAQ:SSYS) have traded up from $18.04 (March 10, 2017) to $25.28 (April 26, 2017)—an increase of just over 40%. This had left, as of the close of trading on April 26, oscillators like MFI (91.04) and RSI (81.09) and trend indicators like ADX (37) at extreme levels, broadly and uniformly signaling overbought conditions.
It should be noted that SSYS reports earnings on a non-GAAP basis. Avg. non-GAAP analyst estimates for fiscal year 2017 sum to thirty cents per share. Thus, SSYS, at its current close of $24.83, trades at a ratio of 82.77-to-1 relative to its forward non-GAAP consensus estimate for FY 2017 (forward P/E of 82.77). These non-GAAP estimates, however, do not demonstrate significant YoY earnings growth—certainly insufficient to justify a multiple approaching 100.
It should further be noted that shares spiked more than ten percent last week when a Piper Jaffray analyst issued a research note opining that revenue would outstrip expectations, and raising the price target from $21.00 to $28.00. On the other hand, improvements notwithstanding, Stratasys continues to trade at a rich valuation, and a smaller equity research firm, Standpoint Research, on Apr. 24, 2017, reduced its rating on Stratasys to Reduce from Buy. Assuming that Piper Jaffray's upgraded price target represents midterm fair value, SSYS trades within 13% of that target, so it is difficult to make the case that SSYS, whose multiple suggests money managers view it as high-growth, is attended by the upside characteristic of, and countervailing the risk associated with, high-growth equities.
Accordingly, retrenchment—regardless of the fundamentals underlying 3D printing in general or Stratasys in particular—seems more likely than not over the near term. Risk of retracement may be particularly acute in view of Stratasys's upcoming conference call to report Q1 results, scheduled to take place before the market opens on May 16, 2017: money managers may prefer the certainty of locking in gains to the uncertainty of an earnings call discussing a quarter with less-than-stellar expectations at equity valuations that can only be sustained with stellar performance. Nasdaq data illustrates that the short interest, as measured by days to cover, has doubled over the past month. While there is always a risk that elevated short interest may set the stage for a short squeeze and attendant higher prices, it's just as likely that the professional money managers who apparently see more value in shorting SSYS shares than in owning them, may be correct.