- Stratasys shares are trading lower as the company did not raise full year guidance despite a first quarter revenue beat.
- While revenue and gross margins were strong, earnings were only in-line as the company spent aggressively on R&D and SG&A.
- Revenue growth will slow over the balance of the year amid stiffening competition and tougher comparisons, which makes the current 40x multiple excessive.
- While I prefer SSYS to other 3-D printer stock, I would be a seller until shares fall into the $60's when the multiple is more appealing.
Before the bell on Friday, Stratasys (NASDAQ:SSYS) reported quarterly results that failed to impress investors, sending shares down over 6%. The past few weeks have been difficult ones for the 3-D printing stocks as investors sold high-multiple stocks in droves. Companies like Stratasys and 3D Systems (NYSE:DDD) are growing at a lightning fast pace but trade at extremely high multiples. There has also been concern that a large company like Hewlett-Packard (NYSE:HPQ) could enter the space and take significant market share. While Stratasys is the best in breed 3D printing company, investors should wait for a better entry point before going long shares.
In the first quarter, SSYS earned $0.40 on $151.29 million in revenue. While earnings were in-line, revenue did beat by $7.89 million (all financial and operating data available here). It was up an impressive 54% growth rate year over year, though that revenue growth will slip into the 30%'s by the end of the year. While the total revenue growth was 54%, organic growth was 33%, which is slightly less impressive. Now, there has been concern that increasing competition would lead to an erosion in gross margins. We did not see that this quarter with non-GAAP gross margins surprisingly strong at 60.9% compared to 59% last year. This increase was in part due to a revenue mix shift with higher margin product revenue jumping 58% while service revenue climbed 41%.
It is worth noting that Stratasys delivered higher than expected revenue and higher than expected gross margins, yet earnings were only in-line. Given the first two beats, one would have expected a sizable EPS beat. However, SSYS has been one of many growth companies spending aggressively, which negated these positive aspects of the quarter. Research and development costs came in at $16.8 million, which was up 56% while SG&A spending jumped 56% to $67.6 million. Operating expenses increased faster than revenue growth, which pinched profitability.
Now, these investments are necessary to build the brand and maintain a technical edge over the competition. Young, growth companies do need to spend aggressively. They just have to prove that they can generate enough growth to merit these investments and have the financial strength to afford them. For Stratasys, financial strength is not a problem as it is still generating a profit and carries $607 million of cash and short term deposits against no debt.
On the other hand, growth is slowing a bit. While SSYS beat estimates this quarter, it did not increase full year guidance. SSYS continues to expect EPS of $2.15-$2.25 on sales of $660-$680, which is close to what analysts had been looking for. The company expects full year organic growth to come in around 25%, which is markedly lower than this quarter's 33% organic growth. Stratasys is one of many growth companies that is seeing decelerating growth as it inches towards maturity and as competition stiffens. If HPQ decides to seriously invest in this market, I would expect growth to fall materially. The entrance of a major tech company into 3-D printing is one of the biggest risks to these stocks.
Overall, this quarter was a strong one for Stratasys, and I would definitely prefer its shares to DDD. It showed solid top-line growth and strong earnings, though it is going on a spending binge. Nonetheless, growth is slowing, but 25% organic growth is still an enviable rate. With strong growth and better profitability than peers, SSYS is definitely the best 3-D printer stock. Moreover, its ability to grow gross margins alleviates some of the concerns about competition. Still, shares are trading at around 40x 2014 earnings. Given the risk of more competition and slowing growth, this is an excessive multiple. I would avoid SSYS until it trades closer to 30x earnings, which reflects strong but slowing growth. At $88, SSYS is a sell, and I would wait for the mid-$60's before buying.