Stratasys' (SSYS -0.20%) strong second-quarter results are now in the rear-view mirror. So, this seems an opportune time to examine this leading 3-D printing company as a potential investment. In this piece, we're going to look at three reasons why Stratasys' stock price could rise. To be clear -- this is not a declaration that these three things will happen or that the stock will rise. We're just examining the merits of one bull argument thesis.
Fortus 900mc printers for production applications. Source: Stratasys
1. Sales of high-end printers could continue to outperform expectations
Stratasys CEO David Reis once again specified that strong sales of high-end printers, most notably the Fortus line and the Objet500 Connex3 Color Multi-Material 3D Printer, helped drive the company's better-than-expected quarterly results. The Fortus line is targeted to production applications, while the Connex3 is geared toward advanced prototyping applications. This printer was introduced in Q4 2013, and is the world's first and only 3-D printer that can print in multiple colors and materials.
This marks at least the second consecutive quarter where sales of high-end printers were a major reason for Stratasys' better than expected results. These printers have higher profit margins than Stratasys' overall business, so strong sales not only help increase revenue, but also help improve the company's overall profitability.
Multi-material and multi-color prototype made by the Connex3. Source: Stratasys
Stratasys upped both its 2014 revenue and adjusted earnings guidance when it released its second quarter results. The company cited stronger than expected organic growth as a part of the reason for the guidance bump up. (The other reason is covered in the next section.) So, there seems to be a good possibility that these high-end printers could continue with their better than expected sales momentum for the rest of 2014 and, perhaps, beyond.
2. The contributions and synergies from the two service bureau acquisitions could be better than expected
Stratasys closed on two service bureau acquisitions in the third quarter: Solid Concepts, the largest independent 3-D printing services operation in North America, and Harvest Technologies, which has expertise in advanced parts production and materials.
The expected contribution from these businesses is part of the reason Stratasys increased its 2014 guidance, on both the revenue and earnings ends. According to CFO and COO Erez Simha, "$35 million to $40 million (of the $90 million in increased revenue guidance) is a result of the acquisition of Solid Concepts and Harvest (Technologies)." Additionally, Reis noted on the call that these acquisitions would be "moderately accretive" to adjusted 2014 earnings.
Stratasys will be integrating these businesses with its existing service business. So, there are some unknowns here with respect to costs and how long it will take the company to integrate these businesses into one service unit. It's almost a given that Stratasys' projections are conservative. So, Stratasys' 2014 (or more likely, 2015 and beyond) results could be better than expected if the expected revenue and earnings contributions from these service operations do, indeed, prove too conservative. Likewise, Stratasys' future results could be better than expected if the synergies from these new businesses prove greater than projected. By synergies, I mean cross-selling opportunities.
3. A metal printer acquisition could be in the works
Before I proceed, let me note that this is just my speculation. While I do think Stratasys will eventually acquire metal printing capabilities, the timeline is a big unknown. This has everything to do with availability of the right business. When Stratasys buys a company, it generally goes for larger, leader-in-class businesses. Objet, MakerBot, and Solid Concepts all fit this acquisition M.O.
To my knowledge, there are a very limited number of companies that focus on making metal printers that are "larger and leader-in-class." So, it might take quite a while for Stratasys to find the right fit. The company had $577.9 million in cash and cash equivalents on its balance sheet, and no long-term debt, at the end of the second quarter. So, it certainly is in the position to pull the trigger on an acquisition if and when it finds the right one. While an acquisition is most likely, it's within the realm of possibilities that Stratasys will work to develop metal printing capabilities in-house. Stratasys allocated about 10% of its revenue to research and development, and also has a history of partnering with the U.S. Department of Energy's Oak Ridge National Lab.
There is no doubt that the market will respond very favorably to any news on the metal printing front. Prime competitor 3D Systems acquired metal printing capabilities when it bought Phenix Systems last summer. Notably, it's been sold out of metal printers every quarter since it's owned Phenix. 3-D printing in metals is at the beginning of a what should prove to be a very strong growth trajectory, so it's a space that Stratasys will surely eventually enter.
Foolish final thoughts
Personally, I think the first scenario is very likely, and that Stratasys' high-end printers will continue to outperform expectations and help drive better-than-expected results in 2014. The two others scenarios, however, seem much less likely for this year. But they both could very well play out in 2015 and beyond.
This article is one of a five-part series. While all articles are stand-alone, read together they offer a more thorough examination of Stratasys as an investment. The four others are: a look at the company's Q2 earnings report; don't-miss quotes from the conference call; the counter piece to this article, 3 Reasons Stratasys' Stock Could Fall; and Is It Time to Buy Stratasys' Stock, which focuses on valuation.
