DM - Stratasys: Money Talks

2023-09-18 01:05:21 ET

Summary

• Stratasys has been seeking to form new strategic partnerships and collaborations to advance its technology and broaden its market reach, showcasing its growth potential in various industries.
• The company is focused on expanding its market presence beyond traditional industries into healthcare, automotive, aerospace, and consumer goods, positioning itself for future growth and relevancy.
• Stratasys continues to invest in R&D and innovate within the 3D printing space, introducing novel materials and technologies to expand the capabilities and applications of its products.
• Bidders have valued the stock at nearly double its current price, and we, therefore, see potential for as much as 90% long-term upside with limited downside.

Cash Is King

Stratasys Ltd. ( SSYS ) stands at the forefront of the 3D printing and additive manufacturing revolution, offering a unique investment opportunity at scale for those keen on harnessing cutting-edge technology for potential financial upside. Founded in 1989, Stratasys has a rich history spanning several decades and has firmly established itself as a leading player in an industry poised for extraordinary growth. In this article, we will look to provide an in-depth exploration of why considering an investment in Stratasys stock might be an attractive proposition for investors seeking exposure to the exciting world of 3D printing.

Stratasys has been making headlines recently with multiple potential bidders taking shape, and it's essential to understand the significance of these developments in assessing its investment potential. The company has consistently demonstrated its commitment to technological advancement and market expansion with its diverse makeup in multiple industries and applications . Here are a few noteworthy recent news items that have been driving attention to Stratasys:

1. Formation of Strategic Partnerships (Value): Stratasys has actively engaged in forming strategic partnerships and collaborations with industry leaders. Such alliances and industry consolidation are designed to advance its technology and broaden its market reach. Notably, Stratasys has been the center of bids from names like Nano Dimension ( NNDM ) and 3D Systems ( DDD ) due to their industry-leading scalability and profitability. These potential buyouts and possible partnerships not only enhance Stratasys's reputation but also serve as a testament to its growth potential in various industries, and value the stock at more than double its current trading price.

2. Market Expansion (Growth): Stratasys has been making concerted efforts to expand its market presence. Its focus extends beyond traditional industries into areas such as healthcare, automotive, aerospace, and consumer goods. By diversifying its portfolio and adapting its technology to meet the unique needs of different sectors, Stratasys is positioning itself for future growth and relevancy. This growth has been seen in EPS uptrends and is expected to continue going forward thanks to high profit margin opportunities such as GrabCad print sales .

3. Innovative Technologies (Diversification): The company continues to invest in R&D and innovate within the 3D printing space. Stratasys has introduced novel materials and technologies ( Figure 1 ), expanding the capabilities and applications of its products. Its commitment to pushing the boundaries of 3D printing technology is a strong indicator of its growth-oriented strategy.

Figure 1. Stratasys is at the forefront of 3D print technological innovation in a diverse variety of sectors including healthcare

These recent developments serve as a testament to Stratasys's dedication to innovation and its aspirations to remain a dominant force in the 3D printing industry. Such progress and strategic moves not only generate attention but also underline the company's potential for future growth. We believe SSYS is undervalued, trading well below historical averages as well as in relation to peers. We see as much as 90% upside from current prices here with plenty of cash on hand and with bidding wars for the stock ensuing.

Current Valuation

Both current and future valuations are critical aspects to consider when evaluating the investment potential of a company in a growing space. Stratasys operates in a dynamic and evolving industry with immense growth prospects and hype. Assessing its valuation involves examining various financial metrics, understanding industry trends, and considering future potential. One financial metric in which SSYS stands out is the P/S ratio. SSYS is one of the only 3D printing names that has achieved considerable scale and it can be seen in their revenues in comparison to peers (Figure 2).

Figure 2. SSYS is a leader in generating revenue along with profits which is what has allowed them to build up a hefty $200 million+ cash position

Similarly, SSYS is the only company within the 3D printing industry that is bringing in earnings before income, tax, depreciation, and amortization (EBITDA) (Figure 2). This industry-leading valuation along with the forward potential for growth is what makes Stratasys our favorite name in the sector. It should be noted that net income has been on a downward trend since COVID, likely because businesses have been less inclined towards R&D spending during this unpredictable high inflationary environment. We see this as a major reason why SSYS should take these bidders cash infused investments with just over $200 million in cash on hand & a roughly $40 million average quarterly cash burn (6 quarters trailing), SSYS would have only a year and a half before cash became an issue unless they except a purchase from NNDM &/or DDD.

The 3D printing market is expected to experience substantial growth in the coming years with Stratasys, being a key player in the industry. This is what has driven bids from cash-heavy Nano Dimension and DDD systems. Stratasys would prefer to stay in the driver's seat instead of going after Desktop Metal ( DM ) looking to build up new synergy within its already expansive portfolio. With available cash on hand and DM's current cash burn, we do not see this acquisition as realistic for SSYS.

In essence, Stratasys's valuation should be considered in the context of its position within a rapidly growing industry, its competitive strengths, and its potential for continued innovation and revenue expansion. Competitors have valued SSYS at as much as double its current price ($24-27) which is why we believe there is as much as 90% upside in this name for long-term investors (1.5-3 years).

SSYS does trade at a P/E ratio of over 68x earnings, and while the stock may appear to be trading at a premium when looking at more mature non-additive manufacturing tech stocks, this could reflect investor confidence in the company's future prospects within the dynamic 3D printing sector. The stock trades over 20% below most historical valuation metrics (EV/Sales, P/E, P/S) and even further below their closest competitors in a sector that is already beaten down at or below book values based on assigned risk. We see these undervaluations turning to premium valuations in changing forward macroeconomic conditions.

Risks

Before making an investment decision, it's crucial to assess the inherent risks associated with investing in Stratasys. The 3D printing industry, like any other, is subject to specific challenges and uncertainties that can impact the company's performance. Some key risks to consider include:

1. Market Competition: The 3D printing industry is highly competitive, with numerous companies vying for market share. Stratasys faces competition from both established players and emerging startups, and its ability to maintain its competitive edge is crucial to its long-term success. Market competition and industry consolidation could lead to dilution and reckless decisions for any group in the sector.

2. Technological Advancements: The rapid pace of technological advancements can render existing products and technologies obsolete. Stratasys must continue to invest in research and development to stay ahead of the curve and adapt to emerging trends. Subtractive manufacturing technologies such as CNCs have proven more useful historically, but new adoptions to the additive manufacturing industry may provide catalysts to the stock's share price.

3. Economic Factors: Macroeconomic downturns and fluctuations can affect demand for 3D printing solutions. Stratasys's revenue streams may be sensitive to broader economic conditions, posing potential risks to its financial performance during economic uncertainties. Rising interest rates should be acknowledged as a long-term laggard to the stock if inflation lingers longer than expected.

4. Operational Challenges: Stratasys must effectively manage its operations, production, and supply chain to meet customer demand. Disruptions or inefficiencies in these areas can impact the company's ability to deliver products and services on time. This has been an issue in many young tech companies ranging from additive manufacturing to LIDAR and more.

Debt is not a major issue for SSYS, with only ~$20 million on their most recent balance sheet. It's imperative for potential investors to conduct a thorough risk assessment, taking into account the specific industry dynamics and the company's ability to navigate these challenges effectively. While Stratasys has a strong track record and promising growth prospects, recognizing and mitigating these risks is essential for informed investment decisions.

Indubitable Information

"In God we trust. All others must bring data" - Robert Hayden

Understanding the company's history, unique attributes, and achievements can provide valuable insights for investors considering Stratasys stock. Here are some interesting facts about Stratasys's growth presence:

Stratasys was founded in 1989 by Scott Crump and his wife, Lisa Crump. Scott Crump is credited with inventing Fused Deposition Modeling ((FDM)), a key 3D printing technology that forms the basis of many of Stratasys's products. Stratasys has continuously expanded its material offerings with over 116 materials now offered , enabling customers worldwide to print with a variety of materials, including plastics, metals, and even environmentally friendly bio-compatible materials for multiple different applications.

These intriguing facts highlight Stratasys's legacy of innovation, its commitment to serving diverse industries, and its focus on advancing 3D printing technology for both commercial and educational purposes. Such qualities and more contribute to the company's unique identity within the 3D printing sector.

Overall Summary

In conclusion, Stratasys Ltd. presents a compelling investment opportunity for those seeking exposure to the dynamic and rapidly growing 3D printing industry. Recent news & bidding wars underscore the company's dedication to innovation and its pursuit of strategic collaborations to expand its market reach. However, it's essential for investors to recognize the inherent risks associated with the industry, including increasing competition and economic uncertainties.

Stratasys's valuation should be viewed in the context of its potential to capture a larger market share within the thriving 3D printing sector than competitors with lower risk. We believe SSYS has the potential to nearly double if they choose to accept a buyer's bid. Worst case scenario, they go through with a purchase of Desktop Metals instead of accepting these bids, macroeconomic conditions decline, and cash burn increases. Ultimately, investors should conduct thorough research, assess their risk tolerance, and align their investment objectives before making any decisions regarding Stratasys stock. As with any investment, due diligence is paramount, and a well-informed approach will contribute to sound investment decisions in the ever-evolving world of 3D printing and additive manufacturing.

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