Stratasys - Short-Term Appeal Has Increased, Long-Term Payoff Is Still Unsure

| About: Stratasys, Inc. (SSYS)


Stratasys has sold off like all momentum names, yet growth continues.

Smart and aggressive acquisitions make it a dominant market player in a long-term growth industry.

The payoff for investors remains unsure in the long term, it all depends on a profitable and dominant position in a long-term growing industry.

Investors in Stratasys (NASDAQ:SSYS) have been on a roller-coaster in recent months as the momentum carried the stock both up and down in an aggressive fashion.

Despite the increased short-term appeal, I remain cautious. The company yet has to show GAAP earnings in a sustainable way while it commences a big valuation. Long-term holders could easily make a great investment if the company continues to be a dominant and profitable player in the industry in the future.

Yet, it remains hard for me to estimate the company's chances of continuing to be a dominant player in the future, the main reason why I am cautious.

First-Quarter Headlines

Stratasys reported first-quarter revenues of $150.9 million which is up 54% compared to last year. Stratasys reported GAAP earnings of $4.1 million compared to a $15.5 million loss in the year before.

Excluding the acquisition of MakerBot revenues would have been up by 33%. MakerBot reported revenues of $20.6 million which represented a 79% growth rate.

Note that the quality of earnings was low. The company was only able to report earnings after earn-out obligations fell by $7.5 million, resulting in a boost to the bottom line. A negative $4.6 million income tax provision provided a boost to the bottom line as well.

A total of 8,802 3D printing and additive manufacturers systems were sold during the first quarter.

Recent Acquisitions

As recent as April, Stratasys announced the acquisitions of Solid Concepts and Harvest Technologies.

Solid Concepts was acquired for $172 million on closing while the total deal value could increase towards $295 million on the back of $60 million deferred payments and $63 million in retention related payments. Important to notice, the deal value is partially pegged to the share price of Stratasys, avoiding additional dilution if the stock were to thank.

The $295 million potential deal tag values the company at roughly 4.5 times annual revenues of $65 million being generated in 2013. The company's 450 workers serve 5,000 customers focusing on additive manufacturing and supporting technologies.

To financial details regarding the acquisition of Harvest Technologies have not been announced. The company is much smaller, employing about 80 workers which serve about a 1,000 customers. The company focuses on additive manufacturing in the aerospace segment, yet no revenue results have been released.

Strategic Rationale

The recent acquisitions of Solid Concepts and Harvest Technologies will be combined with RedEye, a new organization to be led by Joe Allison. The new business will create a strategic platform for meeting additive manufacturing needs.

The business unit will target a $2.0 billion both primary and secondary service market opportunity, according to research from Wohlers in the presentation.

The new platform should increase the manufacturing and end-use production capabilities of Stratasys, allowing more comprehensive solutions for each of the three stand-alone businesses. The new organizational set up should furthermore create more cross-selling capabilities.

Both the deals are anticipated to close in the third quarter, and should be accretive to non-GAAP earnings per share within the first year after closing.


With some 51 million diluted shares outstanding at the moment of writing, Stratasys commences a $4.6 billion equity valuation at $90 per share.

At the same time the company holds $607 million in cash, equivalents and bank deposits while it operates without the assumption of debt. This results in operating assets being valued at $4.0 billion, yet dilution and lower cash holdings resulting from the two acquisitions as discussed above could push this valuation towards $4.5 billion.

For the year, Stratasys foresees GAAP earnings of roughly $10-$20 million while non-GAAP earnings are seen between $113-$119 million. The difference is substantial and can partially be explained thanks to an expected $65 million in amortization charges.

Revenues are seen between $660 and $680 million for the full year, driven by 25% organic growth rates and acquisitions. Note that the guidance does not include the two recent acquisitions as discussed above.


The other big elephant in the room is 3D Systems (NYSE:DDD). 3D is worth $5.0 billion at the moment, or $4.7 billion excluding cash which is a touch above the expected $4.5 billion valuation of Stratasys.

Shares of 3D have seen a roughly 50% correction from highs at $97 in January of the year, while the sell-off in shares of Stratasys was limited to still a hefty 35%.

At its first-quarter earnings report, 3D guided for annual revenues of $680 to $720 million for this year, just above Stratasys' guidance of $660 to $680 million. While Stratasys expects to report fractional GAAP earnings thanks to items discussed above, 3D should be able to earn about $50 million on a GAAP basis. Stratasys might however be able to overtake 3D's leading position in terms of revenues, thanks to higher reported growth and recent acquisitions.

All of this still says little about who will be the winner and how the industry will evolve. The strong growth will undoubtedly attract competition and Hewlett-Packard (NYSE:HPQ) is often named as a big technology company aiming to jump on the bandwagon. Of course the choice of entrance, either organically or through a big acquisition, will have a huge consequence for investors in the field.

While volumes will increase, it is for sure that prices will come down. Stratasys shipped 8,802 machines in the first quarter, at an average selling price of little above $17,000. Of course, this is no great objection for corporate purposes, yet such average prices make it impossible to penetrate the consumer market. I note that I took simple average revenue numbers, as the company does not break down the average selling prices between products.

These numbers are important as companies like Stratasys and 3D Systems rely heavily on machine sales. For the future, the lucrative service sales, which include materials, appears to be the business model. This could allow these companies to operate under the so-called "razor-blade" Gillette business model.

For now, Stratasys is moving along nicely, although it is not yet profitable on a GAAP basis, while it continues to report impressive growth and apparently makes smart acquisitions. An investments in the company relies largely on the future, which looks good at the moment. Still the company's role in shaping the future is still to be seen, despite being a current dominant market player.

I remain on the sidelines, but might pick up some shares if the recent correction continues.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.