Analysis: Stratasys (SSYS)

This 3D printing company is seeing healthy double-digit growth by expanding its applications into new arenas.

Stratasys (SSYS)

from The 100% Letter

After a tough year it’s time to by 3D printing stocks again. And my favorite stock in the group is Stratasys (SSYS).

Stratasys is a $4 billion market cap company based in Minnesota and Israel. Technically known as “additive manufacturing”, 3D printing is the process of laying down successive layers of material to build objects of almost any shape.

Industrial printers use a variety of materials to “print” object. Plastics are the most common material used, although metals and even wood are being increasingly used as printer jets and software become more sophisticated.

Stratasys isn’t new to the 3D printing industry. The company purchased IBM’s (NYSE:IBM) rapid prototyping IP in 1995 and brought in 16 of IBM’s 3D printer engineers. The company went on to patent a process of converting 3D CAD files into 3D parts using a system called fused deposition modeling (FDM).

3D printing stocks, including Stratasys, have soared in popularity over the last few years as the technology has become more affordable and the companies enjoyed rapid growth.

The technology is reshaping manufacturing processes around the world. Use of printers is moving beyond prototyping, hobbyist use and small-scale manufacturing, and becoming a reality in full-scale production lines. The benefit of greater speed, tighter tolerances and lower cost means that 3D printers will be fully integrated into manufacturing lines around the world within a few years.

Today, the global market for additive manufacturing is around $4 billion. Consulting firm Wohlers Associates states that in just five years, that market size is expected to swell by more than 4-times, to $21 billion.

Over the next few years we expect to see printer prices come down, capabilities go up and material use diversify. Despite the potential, excitement over the revolutionary process has died down a bit. And so have lofty valuations for publicly traded 3D printing stocks.

In 18 months, I fully expect this stock to be trading for $160. Here’s why:

SSYS’s revenue growth of 30% in 2012 and 36% in 2013 was impressive. But 2014 should be even better, with revenue growth of over 55%. I expect that organic revenue will grow in the 25% to 30% range for the foreseeable future, and that will power similar EPS growth. This puts SSYS near the top in the industry, a factor that has made the stock comparably stable. When the rally starts again, I expect this stability to power SSYS’s rise.

While the 3D printing industry has come a long way from its beginning in the 1980s, it is still a very fragmented market. It’s safe to say that the 3D Printer industry is ripe for consolidation. For its part, SSYS has completed several acquisitions since 2012 including Objet, MakerBot, Solid Concepts, Harvest Technologies and GrabCad.

While much of the 3D Printer potential lies within industrial applications (SSYS owned 55% of this market in 2013), the consumer and desktop market (where SSYS owns around 35% of the market) is extremely attractive as well. This is why SSYS purchased MakerBot in 2013 (MakerBot’s revenues became “organic” in August, 2014). MakerBot’s sales (18% of total sales) have been better than expected, with sales doubling in the recent quarter.

Several management teams have acknowledged the growing importance of software on both the industrial and consumer ends of the business. That’s both a challenge, and a huge opportunity. SSYS itself has stated that it is looking to turn up the intensity and add software capabilities to its offerings.

At its current level, SSYS now trades with a forward PE of just 26. It’s time to start buying.

Tyler Laundon, The 100% Letter, 100percentletter.wyattresearch.com, 866-447-8625, January 8, 2015