Stratasys 1 Year Later: Penetrating Its Growth Markets

Summary

• This is a one-year update following my article "Stratsys: Earning Cash Hand Over Fist On Product And Service Sales."
• New model F123 3D Printer for rapid prototyping enjoys a successful launch with over 1,000 sales, acquiring more than 500 new customers.
• Stratasys' uses in aerospace component manufacturing processes receives further adoption, increasing market penetration.

During August of 2016 I rated Stratasys Ltd. (NASDAQ:SSYS) a buy (price $20.90) at the conclusion of my report on their turnaround efforts in Stratasys Ltd: Earning Cash Hand Over Fist On Product And Service Sales.

Since the previous article's publication, the stock's price climbed to over $25.00 as my estimation of SSYS's solid financial footing was reinforced in subsequent earnings reports. The company's market leadership in the 3D printing industry was made more evident by the firm's successfully launched F123 rapid prototyping device which found a market in hundreds of new customers and upgrades by present customers. This year the company also has enjoyed a contract award from Airbus to produce certain components for aircraft. Since this year's high of $30.88 the stock has retreated substantially to $22.53 per share.

In my view, today's ask of $22.53 per share represents a fair price for patient long-term investors.

Here is the meat of your update on Stratasys one year later.

News And Views

Aerospace

Aerospace is touted by SSYS management as a mega-growth opportunity for the company. I agree with them on this point. However the adoption of 3D printing manufacturing methods from the aerospace segment will continue to experience a large amount of friction before coming "online" and delivering massive profits to the company.

The 3D printing value proposition to the aerospace industry is confirmed by Airbus and other manufacturers' and their growing adoption of this technology.

However, the high hurdles of safety and reliability stress testing, which are time consuming and must be done with special thoroughness due to the new technology 3D printing really is, make a significant drag on the pace at which the SSYS aerospace business will continue to grow.

The good news is that over the coming years aerospace engineers will continue to adopt 3D printing's capabilities into their design specifications and this is where the significant long-term growth in aerospace business will come for SSYS.

Keep in mind the booming aerospace manufacturing industry already is up to its eyeballs in orders for present-generation aircraft designs which incorporate only few 3D printed components.

SSYS' Aerospace slide from August's last bullet point highlights the aerospace industry's adoption of 3D printing techniques for the next-generation of aircraft.

Source: Stratasys Powerpoint 08/2017

Consumer Grade and Services

MakerBot is the premiere 3D printing brand present in classrooms across America. SSYS aims to leverage this large installed base of printers by increasing the use these printers see in the education field. Increasing the use of MakerBot 3D printers will result in greater volumes of resin orders, an important business for SSYS' sustaining incomes through repeat orders of this consumable product.

SSYS has improved MakerBot's integration with the leading personal computing technology in education: Google's Chromebook. This will make it easier for educators to leverage the installed base of MakerBot. The final bullet point announces the "MakerBot Educators Guidebook," a critical tool enabling educators to make increasing use of the 3D printer in class projects.

Source: Stratasys Powerpoint 08/2017

Financials and Summary

Stratasys' financial condition has proven stable since the turnaround with sideways year-over-year revenue. Gross margins on 3D Printer devices have improved with the new manufacturing arrangement for the MakerBot line as the company prognosticated during second quarter 2016.

The firm is still running a net loss as tallied by GAAP accounting standards although they are generating a substantial free cash flow at a six-month run rate of $20 million.

The company remains somewhat expensive based on today's market capitalization of $1.17B compared to annualized free cash flow of $40 million - a multiple of 29. Revenues of approximately $500 million annually imply the company may have some room to cut expenses or reduce R&D when the time is right, providing a boost to earnings per share for some future period.

The company's balance sheet is rock solid listing over $300 million cash and little debt.

Final Word

SSYS' actual business growth will remain paced as their major opportunity in the aerospace segment requires the surmounting of substantial obstacles which can only be accomplished over long periods of time. However the company appears promising and considering the substantial net asset position and leadership in the 3D printing solutions industry the stock price is well justified and is not excessive. I rate SSYS a buy for investors with very long holding periods.

Five-year price target $35 per share based on the continued expansion of their net asset base and increasing utilization by next-generation aircraft designs.

Additional Disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author's interpretation of the information contained in the article. The author may close his investment position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security.

Please follow Faloh Investment and receive timely market insights

For more information please refer to my preceding publication Stratasys Ltd: Earning Cash Hand Over Fist On Product And Service Sales

Analyst’s Disclosure: I/we 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.