The 3D printing market is one of the fastest growing markets in the world. Stratasys (NASDAQ:SSYS) is one of the biggest companies operating in the sector along with 3D Systems (NYSE:DDD). The stock of the company has been on the up during the past 12 months and it has gained more than 37%. However, more recently, the stock is on a downward trend and it has lost about 5% in the past week. The trend is common with the companies operating in a rapidly growing sector as investors effectively pay for the future growth and stocks trade at a premium. However, the long-term growth potential of these companies makes the investment worthwhile. In my opinion, the recent fall in price is temporary and we should see an upward movement in the stock price over the next twelve months.
Earnings and Fundamentals are Strong
Stratasys has shown remarkable growth in its earnings. According to its third quarterly report, the revenues increased from $90.9 million to $126.1 million, which shows a 39% increase. As part of a developing industry, the company spent $12 million on research and development, which is roughly 9% of its sales. We are just over a month away from the next earnings announcement. I expect the company to report impressive earnings once again. However, the outlook for the next year has not gone down well with the investors. In my opinion, the market is putting too much focus on the short-term impact of the guidance. The earnings are expected to be lower than the consensus estimates according to the new guidance.
Let's now look at the main reason why the earnings are going to be lower - Investment in research and development and further investment in the expansion of its sales network. Now, both of these expenses serve the long-term growth of the company. Research and development is extremely important in this sector as there is a lot of pressure to maintain the superiority. Furthermore, the expansion in sales network will ensure that the organic growth in revenue continues in the long term. Stratasys expects the organic growth to be close to 25% during the quarter. In addition, the consolidation of MakrBot should further enhance the revenues. Nonetheless, organic growth rate of 25% is extremely impressive in my opinion.
According to IDC, the 3D printing industry is expected to grow by 29% from 2012 to 2017. Another source expects the industry to grow by $8.4 billion with a compounded annual growth rate of 23%. These growth figures about the industry show why this is one of most attractive industries at the moment. The current market share of Stratasys is 44% and has been the market leader for the last 6 years. If we take into account the expected growth rates in the industry, the decision to invest in R&D and sales network becomes even more important. Stratasys has an advantage in the market, and if the company makes the right moves, it can benefit substantially from its position. Being the market leader allows the company to further enhance its market share. Expected growth rates in the industry along with the investment in R&D and sales network can ensure that the company is able to grow substantially in the long term.
I do not believe that Stratasys has reached its peak and expect the stock to continue to grow. In fact, I believe the company has a lot more room to grow and the industry is still in its hyper-growth period. Sometimes the market ignores the long-term impact of a decision and focuses only on the short term. However, for long-term investors, the decision to invest more in R&D and sales network can only be good news. Investors in 3D printing companies should be ready for these small swings as the companies operating the high-growth sectors tend to show considerable volatility in price. However, the consensus estimates indicate that there is substantial upside potential in this stock. According to the twelve month price target of 18 analysts, the median target price of Stratasys is $138.5 while the current price is $123.5. This gives an upside potential of over 12%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.