Stratasys Inc. (SSYS) is a 3D printer equipment and material company operating in the computer peripherals industry. It was established in 1989 and has dual headquarters in Eden Prairie, Minnesota and Rehovot, Israel. Its systems range from 3D printers to large, advanced 3D production systems. 3D printers are used for prototyping and creating models for testing. They are also used to manufacture finished goods in low volumes. Stratasys printers use patented technology including FDM, PolyJet and SCP for printing. The company also provides materials for printing including approximately 120 proprietary inkjet-based PolyJet photopolymer materials and 10 proprietary FDM-based thermoplastic materials.
Stratasys distributes its products through a network of resellers and independent sales agents worldwide. The revenues of the company are classified under the caption of products and services. Drivers of product revenue include the adoption rate of the products and the potential capital budget of the consumers. It is also dependent on the amount of systems installed around the globe because a greater number of systems lead to higher material revenues. Service revenues are driven from installations, trainings, maintenance, warrants, service contracts and RedEye paid parts service. Stratasys generated 83.5% of its revenue from the product segment during the year ended 2012. The remaining revenue was attributed to the service segment. This indicates that Stratasys relies heavily on its product line and the services are merely incidental. However, the "incidental" services posted around $35 million revenue in 2012.
Stratasys shares are listed on NASDAQ and are trading at around $124. The share price performance of the company predicts an increasing trend in the long run. Its valuations have been increasing for the past five years. Except a dip in 2011, Stratasys shares performed up to the mark. In the previous year, this trend continued and the shares appreciated from around $62 to $124. The main contributor to this growth is the recent hype regarding 3D printers industry. And when it comes to long term investment in a said industry, the investors normally prefer the industry leader. This explains the appreciation of Stratasys stock in the recent past. However, it would not be fair to assume that this was the only reason behind the stock appreciation.
The revenues and EPS, both, have shown a positive trend as far as 2013 is concerned. This also contributed to the appreciation of the shares. This translates to 60.9% of compound annual growth rate (2011-2014), which is quite impressive. The growth rate for the next year is almost 35.5%, which is above the industry average. These growth factors combined with the hype of the 3D industry were the reasons for Stratasys stock performing strongly during the past year.
The 3D printing industry is predicted to grow in the coming future. Gartner predicts that the shipments of printers will grow at the rate of 95.4% and revenues will grow at a rate of 81.9% from 2012 through 2017. This is a very healthy growth rate. Furthermore, the 3D printing market, which currently stands at $288 million, is expected to grow to $5.7 billion by 2017. Sub-$100,000 printers will grow by 49% in the current year, to reach a total of 56,507 units. Wohler Associates anticipate additive manufacturing machine (i.e. 3D printers) products and services revenue to reach $3.7billion by 2015, which will further increase to $6.5billion by 2019. All these estimates and predictions indicate a healthy growth of the 3D printing industry in the coming years. The growth of low-cost printers averaged at 346% during 2008-2011. A growth of 46.3% was also seen in 2012, pointing towards the potential of the consumer printing industry. The 3D printing industry will continue to grow, with the consumer printing segment also contributing significantly.
Stratasys holds around 45% of the 3D printing market and has been the market leader for the last six years. With a leading position in the market, Stratasys is poised to benefit from the future growth prospects of the 3D printing industry. Despite the industry growth and the leading position of Stratasys, it is not that simple to predict the future based on historic performance. It is important to look into certain market catalysts that can affect the future performance of Stratasys.
Mergers and acquisitions
Stratasys has been making strategic acquisitions in the recent past. It acquired Objet; an Israel based 3D manufacturing company and MakerBot, which focuses on consumer 3D printing products. Currently, the 3D printing industry is going through a consolidation phase. Aggressive acquisition strategies by 3D Systems Corp. (DDD) and Stratasys are indicative of this fact. In a consolidated industry, the big players can enjoy high margins by locking in customers. This will also raise the barriers of entry for new players to enter the market. Hence, the strategy is justified; but who will pose a threat to these market leaders? The answer will depend on the relative strategies and performance of the current competitors. Research and development progress, technology and patent development will be the key factors in determining the fate of the 3D industry players.
MakerBot is a leader in desktop 3D printing. It has built the largest installed base of desktop 3D printers sold to innovative and industry-leading customers worldwide, including engineers, architects, designers, educators and consumers. Their focus is on the consumer printing industry. By acquiring MakerBot, Stratasys set a foot in the consumer printing industry. As we explored earlier, the consumer printing has considerable growth potential and the company is set to compete with competitors like 3D Systems. MakerBot is also developing a Printing Ecosystem which includes the thingiverse; which is the largest collection of downloadable models and designs in the industry. It also added a digitizer scanner to its portfolio which will help consumers to scan objects in 3D. The online model database will help people in printing objects without the headache of modeling the object themselves, given that not everyone has the skill to model an object. The digitizer scanner will exponentially increase the design database (thingiverse) by enabling consumers to upload product models. Overall, the Ecosystem will play a significant part in deciding the future of Stratasys. We already know that the app ecosystem of Apple and Android is not allowing users to switch to other operating systems; even powerful ones like Linux. This implies that a good ecosystem can be very important in enabling the company to retain and increase its consumer base. The only downside of this acquisition is the potential cannibalization of some Stratasys products.
Stratasys merged with Objet in 2012. Objet was a large 3D printer manufacturing company and it was inclined towards making high end 3D printers. The newly formed Stratasys Ltd. will benefit from the synergies of this merger in terms of technology sharing, enhanced distribution network, larger geographical footprint, R&D sharing and manufacturing techniques. With the addition of Objet, the company will be able offer roster inkjet-style 3-D printers that are faster, offer finer detail and smoother surfaces, and incorporate softer materials. These facts point towards the benefits of synergic gains that will originate from this merger.
Stratasys holds nearly 500 granted or pending additive manufacturing patents worldwide.
It seems that the company does not have patent issues. This is a significant competitive advantage as the 3D printing industry is highly reliant on technology.
Comparative analysis of Stratasys are 3D Systems Corp. is performed to gauge the relative strengths of the company in terms of revenues and earnings.
Revenue comparison of the companies reveals that Stratasys will catch up 3D Systems in terms of revenue by 2014. The latter will maintain a rather linear growth rate.
The EPS comparison shows that the EPS of Stratasys will rise at a higher rate than that of 3D Systems. This might be attributed to Objet and MakerBot mergers.
Factors like technology improvement, patents portfolio and the development of a printing Ecosystem will decide the future of the two companies. Currently, 3D Systems is bigger than Stratasys in terms of revenue but this is likely to change in the future.
In our view, both the companies will compete on an equal basis in the coming future. Stratasys and 3D systems will retain their position as industry leaders.
P/E ratio of the company is quite high and investors are paying almost $53 per dollar of earnings. This P/E reflects the current hype surrounding the 3D industry. The growth estimate of the industry for the next year is around 17% and 13% for the next five years. We derived the multiplier of 27x to incorporate the growth factor and investor anticipation of the Stratasys stock. The target price of $78 is achieved. According to this valuation the stock of Stratasys is highly overvalued. However, this multiplier is quite irrelevant at this stage as the market is evaluating the entire industry on its potential to revolutionize almost everything. This kind of growth is bound to attract some strong acquisition interest from companies like Microsoft, Cisco, IBM, Nokia and Apple. With growth in their own respective industries slowing down and mountains of cash, Stratasys is a strong contender for a buyout.
The 3D printing industry is set to grow in coming years. Significant growth will be seen in the consumer printing industry because of evolving printing ecosystems and the relatively declining desktop printer pricing. With around 45% market share, Stratasys is poised to gain significantly out of this growth. The acquisition of Objet, along with its synergic benefits, will assist Stratasys' progress in high end printing. It will also help Stratasys to expand its enterprise clientele. The MakerBot acquisition has also enabled the company to penetrate the consumer market with relatively cheap products and ecosystems that includes platforms like thingiverse. In our view Stratasys will compete head to head with 3D Systems in the future and both the companies have a bright future.
Stratasys is expected to grow and generate even better sales in quarters to come and trends show that it is growing much faster than 3D systems. The current price of Stratasys is pretty high and it is by no means a value investment. However, it is still a much better option than 3D systems and investors should buy it for acquisition prospects and as a breakthrough technology better rather than for multiples.