Stratasys Is Well-Positioned To Grow

|
 |  About: Stratasys, Inc. (SSYS), Includes: DDD, F, GE, HPQ, INTC, XONE
by: IAEResearch

Summary

The growth from the consumer segment will enhance the revenues.

The margins will get better as the company captures a larger market share.

The recent pull back gives the investors a great opportunity to take a position in the 3-D printing stocks.

Stratasys (NASDAQ:SSYS) has diversified its revenue base by making its way into the consumer market. The company has always been ahead of other players in the industrial segment of the high-end 3-D printers. Some of its clients are: NASA Apparel, Ford (NYSE:F), Toyota (NYSE:TM), Lockheed Martin (NYSE:LMT), Hewlett Packard (NYSE:HPQ), Intel (NASDAQ:INTC), and General Electric (NYSE:GE). The acquisition of MakerBot has allowed the company to step into the consumer segment of the 3-D printing industry. As a result, Stratasys has one of the most comprehensive products mix in the market, which should allow the company to manage the volatility in the revenues.

Leading the industrial 3-D printing

Stratasys has a solid presence in the industrial 3-D printing segment, and the company leads its competitors in this segment. It has the leading position due to its size, and its focus on the industrial 3-D printing while other companies are trying to capture the consumer market, which is yet to adopt this technology. Stratasys is capitalizing on the production segment, where the technology has remarkable benefits. Its high-end printers offer the highest number of input materials. This allows the vendors to use it for different products and parts while using the same printer.

Although growing very fast, 3-D printing is still limited towards the industrial production. Manufacturers are mainly using it to make prototypes. In some areas, where durability is in question, 3-D printing takes the lead instead of injection molding due to its layering process. It is also used to make the initial molds while the rest of the production is done on the traditional injection molding. Precisely, the applications of 3D printing in the industrial segment are several, and it is becoming more cost effective as we move forward.

These high-end printers are available on lease by Stratasys's official retailers for as low as $500/ month. However, the industrial segment will take time to absorb this technology. The high-end printers of stratasys range from Fortus 250mc to Fortus 900mc. The variation between these are mainly in the size of the output and number of input materials. Fortus 400mc costs around $185,000 while Fortus 900mc is around $750,000.

MakerBot: A Good Investment?

Stratasys already stands at a promising position in the industrial 3-D printing, which is growing rapidly. Over the last few years, the consumer segment of the industry has grown at a phenomenal rate and the efforts are being made to make the technology mainstream. Some industry experts believe that like desktop printers, we will soon see 3-D printers in almost every household - this prospect warranted an entry in the consumer segment and the company decided to use an established player in the segment by buying MakerBot. Personal 3-D printers usually cost a lot less than the industrial printers and the affordability is a key factor in increasing the use of the 3-D printers by hobbyists. MakerBot's personal 3-D printer costs around $2200.

3D systems (NYSE:DDD) is the biggest player in the consumer segment - although 3-D Systems also manufactures industrial 3-D printers; its position is the strongest in the consumer segment. We believe that MakerBot would allow Stratasys to fight for its market share in the consumer segment. This way, stratasys will gain an advantage of diversification. Although based on the same idea, industrial and consumer printing are completely different markets with their own dynamics. So, if one market slows down, the company can balance its revenues through the other market. Therefore, MakerBot will add sustainability to the company's profitability, which should support the long-term growth of the company.

Trend in the Fundamentals

The companies in the hyper-growth sector tend to grow revenues at break-neck speed. However, sometimes these revenues do not turn into profits immediately. The 3-D printing industry is going through the same phase where the major players are growing the revenues at a phenomenal pace but the margins are negative or very low. Stratasys currently has operating margin of negative 6 and the net profit margin of negative 5.6. On the other hand, average revenue growth has been over 60% during the last three years. However, it should be kept in mind that companies try to capture as much market share as possible at the early phases of growth, which results in higher marketing expenses. As the industry starts to reach normal growth, we expect the company to have solid margins.

Another common trait for these stocks is the abnormally high P/E ratios. For P/E ratios, let's look at the forward P/E estimates - at the moment, Stratasys and 3D Systems have forward P/E ratios of over 37 and 48, respectively. Naturally, the market is excited by the technology and the investors are willing to pay massive premiums in order to get a piece of the expected future growth.

Conclusion

The stocks in the sector have pulled back substantially since the start of the year - Stratasys, 3D Systems and ExOne (NASDAQ:XONE) have lost 21%, 36% and 40% year-to-date. So, the stocks are trading at a much lower premium at the moment and this might be a good time for the long-term believers of the industry to jump in. We believe Stratasys is well-positioned to grow due to its strong position in the industrial segment, which we believe will be the fastest growing segment over the next few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: 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.