Could the go-go days for investors in 3-D printing be coming to an end?
During 2014 alone, some of the sector's biggest names have lost well over one-third of their value. One 3-D printing stock that I personally hold a number of shares of is Stratasys, Ltd. (SSYS 1.32%), which is 25% off its yearlong highs.
With such a drop, it's worth asking the question: Has the time come to part ways with Stratasys?
Source: MakerBot
Every year, around springtime, I review all of my holdings to see whether or not they are still worth keeping. Because I'm loath to ever sell a stock, I take on the most salient, but general, arguments that bears raise against a company's stock.
Currently, Stratasys accounts for 3.5% of my real-life holdings. Let's take a look at the two biggest arguments against owning the stock, and see how I feel about those reasons.
There are a lot of competitors and no way to predict the industry's future
Indeed, the 3-D printing space has become quite crowded. While just a few years ago, 3D Systems (DDD 2.70%) and Stratasys were the only names of note, a number of smaller players had announced IPOs during the past two years.
And that doesn't even count the number of private companies that are vying for customers as well. For instance, just this month at the Inside 3-D Printing expo in New York City, XYZPrinting -- a subsidiary of Taiwan's Kinpo Group -- showed off its da Vinci 2.1 printer that would be selling for $150 less than 3D Systems' Cube, and less than half of Stratasys' MakerBot Replicator 2.
That, plus the expiration of patents on some consumables -- which generate high margins for Stratasys -- could combine to drive profitability down in the long run.
Furthermore, the idea that there'll ever be a 3-D printer in every household is farfetched and misses the fact that consumer printers simply don't offer that much utility for the average Joe.
My take is that these are fair concerns for the consumer division, but Stratasys is diversified.
There's little question in my mind that, over time, margins are going to come down in the consumer 3-D printing world. If the dream of a "printer in every house" ever comes true, prices and margins will simply have to come down.
But Stratasys is much more than just a consumer 3-D printing company. As it is, its consumer-focuced MakerBot accounted for just 16% of revenue during the fourth quarter of 2013. The merger with Objet gave Stratasys exposure to a much broader range of automotive, medical, and electronics players. And before either of these mergers ever occurred, sales of Stratasys' Fortus line of industrial printers were increasing at a rapid pace.
The utility of 3-D printers in the corporate and industrial fields is much higher, and Stratasys will likely earn higher margins and benefit from its first-mover advantage as well.
In addition, the company recently acquired privately held Solid Concepts and Harvest Technologies, which will help boost Stratasys' Red Eye business. Customers, typically in the automotive, aerospace, or medical fields, use Red Eye to 3-D print things when they don't have a 3-D printer to do it themselves.
Because these printers can be prohibitively expensive, Red Eye represents a great way for Stratasys to offer a taste of what its industrial printers can do, without having to make such a large up-front payment.
An example of the type of printing Red Eye can produce for customers. Photo: The Motley Fool
Suffice it to say that while consumer exposure is a nice bonus, I'm invested in Stratasys for its diversity across many fields.
The stock is simply too expensive
Again, there's a lot of truth to this concern. As of this writing, Stratasys trades for about 57 times earnings and didn't produce positive free cash flow during the past year.
Even after the recent sell-off, Stratasys' stock is up a monstrous 1,000% over the past five years. Investors who get in now are making the classic mistake of "buying high", and will suffer muted returns in the years to come because of this inflated price.
I'm of the opinion that one shouldn't anchor an investing decision on a past price. What the line of thinking mentioned above ignores is that there's a reason behind these moves. Last quarter, the company grew overall revenue by 62%, and organic growth clocked in at 36%. It's likely that we're in the beginning stages of a steep adoption curve for 3-D printing, and growth may start accelerating.
Unlike 3D Systems, Stratasys has had a much more restrained approach to acquisitions -- MakerBot and Objet are the two big splashes of note. Such acquisitions are tough, and I'm a fan of Stratasys' approach of calculated moves. These acquisitions could add a ton of value over the years.
But possibly the most instructive exercise for investors would be to look at Stratasys' $5 billion market cap right now and ask themselves if they really think that's the roof for the company. In my opinion, as the leader in the field and a healthy balance sheet to fund future initiatives, Stratasys could easily be a multi-bagger over the next decade.
