Stratasys Ltd

+0.87 (+4.29%)
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Why Stratasys Has Collapsed, but Hope Remains


Stratasys Ltd. (SSYS)
37.38 +0.37 (1.00%)
Sector: Information Technology
Published by Capital Market Laboratories on 2015-06-18

What does the rating mean?
3-Month Stock Move: -35.1%
6-Month Stock Move: -53.9%
12-Month Stock Move: -63.5%
30-day Option Implied Volatility: 43.1%
Implied Stock Range: ($33.70, $41.10)
What does "implied stock" mean?

It's been said that 3D printing as a "story" has long been dead and for all intents and purposes, it really is. But that does not mean that the technology is dead. What we're left with is a focus on actual fundamental results company by company which are generally, quite poor. Let's focus on Stratasys.

While SSYS revenue (TTM) has broken new all-time highs for 25 consecutive quarters and now stands above $770 million, the company's operating margins and free cash flow are falling as is net income (TTM), which just hit an all-time low $340 million loss.

The street has punished both SSYS and main competitor DDD with massive equity declines (SSYS price high is ~$140 back in January 2014) and both face very poor fundamentals as of right now. While there is a single shining light for this company, there are several factors we must be aware of if we are to understand the investment thesis in this company, and in this segment as a whole.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-08-06 $-0.08 $180.0 M $180.0 M $172.7 M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 772 538 267

Operating Margin (QTR) 0.844 0.96 0.85 FALLING

Net Income (TTM US$ Millions) -340 -7 -12 FALLING

Levered Free Cash Flow (TTM US$ Millions) 7 52 -16 FALLING

Research and Development (US$ Millions) 27 17 11 RISING

Research and Development Expense/Revenue 0.158 0.111 0.111 RISING

Stock Returns and Chart

SSYS is down -35.1% over the last three months and down -53.9% over the last six months. The stock has returned -63.5% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom). I have added the "story" part of the stock price (when it was going up because of "possibility,") and the "reality" part of the stock price (it's going down because of "actual results").
Click here to interact with this stock chart

It's a truly meteoric rise we saw in the early days from a $20 stock all the way up to a $140 stock. Now we're back down to $37. One could argue that a 75% return from the $20 range is excellent. Most have argued that the stock collapse is the reality most shareholders have felt.

Now let's examine the visualizations of the critical financial measures that have taken this once high flying stock and crushed it.

Revenue (TTM US$ Millions) 772538267

This first chart should confuse a bit. What could look better? Revenue (TTM) has increased and broken new all-time highs for 25 consecutive quarters. SSYS is growing revenue by 43.44% year-over-year. That's huge (some of that is through acquisition). Any number over 20% has an added impact on the fundamental (star) rating.

What do all these numbers mean?
SSYS's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Net Income (TTM US$ Millions) -340-7-12FALLING

If the revenue trend confused us in that it looks so good and the stock price has looked so bad, the net income (after tax profit) over the trailing twelve months chart will explain everything.For the most recent trailing-twelve-months (TTM) the company reported net income of -$340 (million) which is an all-time low by a HUGE amount. As a heat check, we can see that one-yer ago the firm reported a net loss of $7 million. Two-years ago the firm reported a net loss of $12 million. Yikes.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Both are at all-time lows.

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Normally I step into a discussion of free cash flow at this point, but I'm going to skip that part and move to R&D and then a wonderful side-by-side comparison of SSYS and DDD.

Research and Development (US$ Millions) 271711RISING

Research and Development (US$ Millions) in the most recent quarter for SSYS was $27 million which is up 62% from last year's value of $17 million and up 152% from two-years ago ($11 million). The company is also spending $0.16 of every dollar in revenue on R&D, which is up from $0.11 about two years ago.

No matter how we slice it, SSYS is committing substantially more resources to R&D. That's actually a bullish signal in my opinion. The company clearly has not hit its stride in terms of earnings, so it better be developing more products and ideas. There is a nasty habit of stock based compensation to slip into R&D expense (I have no idea why firms do that). I'm not sure if that's the case with SSYS, but in any case, the R&D trend speaks for itself. SSYS has NOT given up.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the gold line.

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Before I come the conclusion, let's look at SSYS and DDD side-by-side across nine factors in one single image.

Tale of the Tape

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Let's take this row by row. Across the top we can see that SSYS has larger revenue than DDD but wildly larger losses (in the last year). SSYS earns ~$276,000 in revenue per employee while DDD generates ~$306,000.

Moving to row two, we can see that gross margin % for both firms is essentially identical and both firms spend about the same in R&D per dollar of operating expense.

Finally, row three shows us that SSYS is growing revenue substantially faster than DDD, yet it has a lower price to sales. In English, for every one dollar of revenue for SSYS, the firm get $3.48 in market cap. For DDD, one dollar in revenue gets ~$4.58 in market cap. The equity market is pricing in greater growth for DDD.

SSYS (and DDD) were the highest flying stocks for a period of time. Stratasys saw its stock rise nearly 7-fold as the promise of 3D printing and a true manufacturing revolution took the entire world by storm. That possibility and hope is still there. In fact as time goes by we see more and more possibilities. While the "story" is strong, it's the "facts" that now drive these stocks. The facts for SSYS are not good. Revenue is booming, no doubt, but the firms losses are mounting to extreme levels and the equity market at large is wildly underwhelmed with the firm's execution.

Now we must ask ourselves, "is SSYS too cheap, just as it was too expensive when it peaked at $140?" That's an interesting question to consider.