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The future of Stratasys (NASDAQ: SSYS ) is bright even if valuations are quite high for this name. The company operates in the growing 3D printing and manufacturing application sphere that is seeing strong levels of growth and investor interest. As a result, Stratasys has seen its stock rise over 80% in the past year. Further, the company now operates at premium valuations with a price-to-sales ratio over 12 and forward price-to-earnings ratio over 41. The company, though, still has more to offer investors. The two main catalysts that can keep Stratasys strong and increase valuations further is its movement into the desktop printing services along with the company's smart use of capital.
The first major place of growth for Stratasys is with everyday consumers and small businesses. Currently, the majority of their business is done in an advanced manufacturing, but the company closed a deal with MakerBot, a consumer-based 3D printing manufacturer, in August . That deal brings in an expert team on consumer 3D printers. Up until the deal, Stratasys had not shown less interest in moving into the consumer market. Their lowest-priced device, Mojo, came in with a price tag of $10,000, and it was marketed toward small businesses that needed prototype devices, such as boutique artisans, architects, and design stores. Whether or not the deal was done out of necessity or out of general interest, MakerBot had become a player in the game with its Replicator and Replicator 2 printers that came in at much cheaper prices (around $2000) .
The future of the consumer business is gigantic. 3D Systems (NYSE: DDD ) , Stratasys' closest competitor, is already in the space with their Cube printing system . The printer starts at $1299, and it is focused on the consumer's ability to print everyday household items, jewelry, and more. Stratasys, though, is taking a slightly different approach, and one that we believe will allow them to outperform 3D Systems. First, the company has partnered up with UPS (NYSE: UPS ) to provide 3D printers in-store . Customers can print at the store and ship a product right away or take it with them (similar to the old 2D printing market of Kinko's). In that way, the company can create interest for 3D printers as well as get their brand name out there . 3D Systems has formed a partnership with Staples to sell their products.
The Potential in Consumer Printing
The 3D consumer printing industry potential is gigantic, and it should provide a lot of returns for the company. The company has noted that they believe 35K – 40K desktop printers were sold in 2012, and that number should double in 2013 . From there, it's anyone's guess. Photizo Group, an imaging research firm, believes that 15% of the 3D printing industry could be personal consumption by 2017 . They see the number of printers being sold at 650,000. Even if Stratasys had a quarter of the market, they could make nearly $500 million at current pricing for Mojo and Replicator. Those sales would just be in consumer printers alone and does not count the upside in inks and maintenance parts as well as the company's advanced manufacturing division that is growing at significant rates as well. As one can see, the growth here is definitely exciting.
Stratasys has already laid out how much growth they expect with these new initiatives. The company expects 20% growth in revenue consistently for the next several years and can see operating income at 15-20% of those sales .
Another aspect of the company that we believe is beneficial to investors over the long-term is the company's strategy for horizontal integration. Stratasys is making smart acquisitions in areas where they are weak, but they are also focusing in on in-house R&D that can promote a lot of organic growth. The company has noted they will invest $40M-$50M per year into the high-end space of 3D printing. The company, additionally, is dedicating about 10% of their sales to R&D per year . We believe that the short-term hit to operating income and net income is a benefit the long-term ability for the company to develop technology in-house and more cheaply than being required to spend on acquisitions. Further, doing fewer acquisitions means current shareholders benefit more and do not have to expect significant share dilution from more public offerings or major debt packages.
If the company were able to maintain sales of around 20%-25% per year through 2017, the company would be making around $1.2 billion in sales. The company has noted that they believe they can produce net margins at 16-21% as well. That would put net income at $192 million to $252 million. Keeping shares outstanding the same, that would put EPS at 6.0 – 7.9, bringing price-to-earnings down to 17 – 12.9. As we can see, the valuations are not as strong if the company can produce the type of earnings that they have noted they can. With a focus on the consumer and smart use of money, Stratasys is a riskier acquisition but one that offers smart exposure to a burgeoning industry.
With valuations as high as they are today, we at The Oxen Group still see more upside. For the more conservative investor, any pullback of significance on Stratasys that does not harm these two major catalysts is a great buying opportunity.
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