Shares of recent Motley Fool Rule Breakers inductee Stratasys (Nasdaq: SSYS ) took a tumble yesterday, falling 19% on weaker-than-expected sales and rumblings of more trouble to come.
The maker of "Dimension" direct digital manufacturing (DDM) machines -- no relation to the Dell PC line of the same name -- reported only 11% growth in sales last quarter. And while profits were up 13% on improved profit margins, I can't help but notice that the firm shipped 4% fewer units than the year-ago period.
CEO Scott Crump explains the disconnect: "Our high-end FDM system business ... grew by 33%." You see: "Our direction over the past two years has been a departure from our longer-term vision of driving adoption through greater affordability." Rather than trying to sell the concept of DDM on price, Stratasys has shifted to selling it on tech, pushing "higher-priced 3-D printers that provide customers with improved functionality." Hence, more sales of more expensive, more capable machines. Fewer sales of cheaper, less capable mini-factories.
Crisis and opportunity
Cue the overused, trite reference to how the Chinese symbol for "crisis" is the same as for "opportunity." Crump understands the risk of shifting his business model, acknowledging "the difficulty in selling a relatively new technology to domestic customers that are contending with a weakening environment for manufacturing, and are less inclined to make innovative investments." And yet, he's willing to gamble that customers will bite, despite the higher price tags of the new machines.
Me, I'm not so sure this is the way to go, and here's why:
Stratasys already enjoys success by putting its machines in the hands of marquee customers like Hewlett-Packard (NYSE: HPQ ) , Garmin (Nasdaq: GRMN ) , Deere (NYSE: DE ) , and Toyota (NYSE: TM ) . The more units it sells, the more its razor-and-blade business model pumps up "proprietary consumable and maintenance" revenue -- the strongest part of the business last quarter, with sales up 17%. Plus, once a customer is sold on a low-end model, Stratasys should have the pole position to upsell said customer to a pricier unit later on. Meanwhile, the consumable revs keep rolling in.
Seems to me that Stratasys' business model isn't broke, and "fixing" it by pushing expensive wares on a reluctant and nervous industrial market may not be the brightest idea. Worse, it might even give struggling archrival 3-D Systems (Nasdaq: TDSC ) enough breathing room to survive. We'll see how that story's going when 3-D reports next week.
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