Despite projecting organic revenue growth of 25%, shares of Stratasys (SSYS 0.74%) were down 10% last week, as the 3-D printing company disappointed investors with 2014 full-year earnings guidance below the Street consensus.
The curse of high expectations in a competitive industry
Investors' reaction to Stratasys' guidance shows how important it is for 3-D companies to go beyond their usual valuation metrics and guidance, and deliver growth figures well above expectations. This is getting harder to achieve, as the industry becomes more competitive.
3D Systems (DDD 0.81%) which recently partnered with Samsung to show off an app that makes custom inserts for specially designed Galaxy Note 3 cases, is partnering with famous manufacturers to gain an extra edge.
On the other hand ExONe (XONE) just lowered its 2013 revenue expectation to a range of $40 million-$42 million, below its prior guidance of $48 million.
Explaining the poor guidance
Stratasys announced that earnings should come in at about $2.20 a share, well below the $2.33 figure that analysts were expecting on average. The company also projected revenue of $660 million-$680 million, while analysts expected $660.5 million.
The reason for the weak forecast is that the company expects to increase spending on marketing, research and development, and selling expenses. In the short run, this will increase the cost of goods sold, and decrease the company's gross profit margin. However, in the long run, this spending increase should strengthen Stratasys' economic moat.
On the bright side, organic sales, which exclude revenue related to MakerBot -- a 3-D printing company acquired by Stratasys in August 2013 for $403 million -- are expected to grow about 25% compared with the previous year. More important, Stratasys expects MakerBot sales to grow faster. In this way, the company's overall sales target is 40% more than last year's tally.
Growth catalysts
Between $50 million and $70 million will be spent to increase capital expenditures in order to sustain growth. This caused the company's earnings estimate to be off by less than 6% from the Street consensus, with shares plummeting after the announcement. However, in the medium run, the increase in operating expenses should translate into higher revenues that will offset the recent increase in cost.
Surely, the 3-D printing industry is becoming more competitive, but Stratasys' scale advantages and focus on research should help the company to continue improving its top line. The company is gradually benefiting from economies of scale. Note that the company will soon start benefiting from synergies associated to the acquisition of MakerBot.
Stratasys is also focusing on plastics, a complementary product to 3-D printers. As Morningstar analyst Daniel Holland notes, once a customer buys a particular 3-D printer, there are only certain types of plastic that the printer can use. By making these materials proprietary, Stratasys could be aiming to create a razor-and-blade business model to strengthen profitability.
Final Foolish takeaway
Stratasys took a beating last week, as the company's full-year-earnings guidance came in below the Street consensus.
However, this is due to the fact the company is increasing marketing spending and capital expenditures to strengthen its economic moat. Without these kind of investments, Stratasys won't be able to grow fast enough to keep up with high expectations, due to increasing competition in the 3-D printing industry.
Synergies from the recent acquisition of MakerBot, a focus on plastics, and the development of proprietary fused deposition modeling technology, should help Stratasys to improve its top line in the next quarters.
