Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Stratasys (NASDAQ: SSYS ) today, and see why you might want to buy, sell, or hold it.
Founded in 1989, based in Minnesota, and sporting a market capitalization of about $1.7 billion, Stratasys is a pioneer in the way-cool 3-D printing business. In other words, it makes machines that extrude three-dimensional objects. The stock is up 170% over the past year, and has averaged 39% annual gains over the past decade. Wow, huh?
One reason to consider buying into this company is because it offers such a high-potential, disruptive product. If 3-D printing becomes mainstream, which is a reasonable possibility, it can be used in all kinds of situations. For example, a mechanic needing a car part might be able to just print it out instead of ordering it and waiting for it. There's even talk of "printing" human organs one day. That's not exactly around the corner, but if it comes to pass, it could be a major game-changer in health care. Medtronic (NYSE: MDT ) and Johnson & Johnson (NYSE: JNJ ) have already begun investing in such technologies. 3-D printing is already being used to make prostheses.
The company is growing briskly, with three-year average annual growth rates of 22% for revenue and 65% for earnings. It's focusing more on the industrial market, while others focus more on the consumer market, though there's some overlap. The industrial market will feature more big-ticket transactions, but it can also be affected by factors such as cutbacks in military spending.
Some speculate that Stratasys may end up acquired by a bigger company, and like it because such a purchase would likely be at a premium price that would send the stock up. But it's not smart to invest based on speculation, and a buyout has a downside, too: shareholders might have profited more, over a longer period, without it. Meanwhile, Stratasys recently did a little shopping of its own, merging with the third-biggest player in 3-D printing, Israel's privately held Objet. One of Objet's strengths is the technology to print with multiple materials at the same time. It also has relationships with some major corporate customers, such as 3M (NYSE: MMM ) and some carmakers.
One knock against Stratasys is its valuation. Its P/E ratio has recently been in the 80s, well above its five-year average of about 50. Its forward P/E is a still-rich 43. Its price-to-sales ratio of 8.2 is twice its five-year average, and its price-to-cash-flow ratio is in three digits. Some are not unreasonable in thinking that after a 170% run this year, the stock has gotten ahead of itself. (Bulls may not be crazy, either, though, as some companies perpetually seem overvalued, as they keep hitting new highs year after year. Amazon.com (NASDAQ: AMZN ) is a good example of that.)
Uncertainty is another downside here. The industry is growing briskly, but we can't know exactly how quickly it will grow. Some have modeled promising expectations, but we can't know just what various printers will cost in, say, 2020, and how many people will buy or use them. It's also uncertain how commoditized printers and their supplies will become. The traditional two-dimensional printer business, for example, has seen lots of generic ink suppliers pop up to steal business.
Another uncertainty is regulation. Over time, there may be regulations that restrict the use and ultimately the growth of the industry. After all, unfettered, it might end up permitting people to just print their own weapons or to violate patents and proprietary designs. Piracy has been addressed in the music business and elsewhere, and it could well happen here, too.
Statasys has competition, too, mainly in the form of 3D Systems (NYSE: DDD ) , another pioneer in the industry. Bulls like its Cube printer for the home consumer and its razor-and-blades business model, while bears worry about margin shrinkage and financially pinched corporate customers, as well as its acquisition strategy. There are some smaller competitors, too, such as Proto Labs (NYSE: PRLB ) and MakerBot, in which Amazon.com has invested. MakerBot has already sold thousands of printers for the consumer market.
One more issue is how open-sourced some of this technology will be. Open-sourcing may widen usage, but clamping down on it can preserve more profits for a company, at least in theory. MakerBot recently angered some when it backed away from open-source hardware.
Finally, not all of the numbers in Stratasys' financial statements are exciting. Free cash flow has been relatively modest, and recently turned negative, for example.
Given the reasons to buy or sell Stratasys, it's not unreasonable to decide to just hold off on it. You might want to wait for more clarity regarding the industry's future, or for free cash flow to grow more, or for the stock's valuation to drop some.
Alternatively, you might want to look at some other high-potential companies, such as Westport Innovations (NASDAQ: WPRT ) or InvenSense (NYSE: INVN ) . Westport designs low-emissions engines that run on natural gas or other alternative energies, and has been partnering with some big vehicle makers to power everything from light-duty vehicles to big equipment. InvenSense makes tiny gyroscopes found in GPS devices and smartphones, as well as a growing number of other items. The company is growing rapidly. You might also look into modeling software specialist AutoDesk (NASDAQ: ADSK ) , which offers the kind of design services needed by the 3-D printing industry.
I actually already own shares of Stratasys, as I'm quite hopeful about its future. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
To help you learn more about the 3-D printing business, The Motley Fool has compiled a premium research report on whether 3D Systems is a buy right now. In our report, we take a close look at 3D Systems' opportunities, risks, and critical factors for growth. You'll also find reasons to buy or sell, and receive a full year of analyst updates with the report. To start reading, simply click here now for instant access.