Stratasys (SSYS +3.24%) is one of two leading 3D printing companies. Along with fellow industry leader 3D Systems, it is a co-first mover in this highly disruptive, high-growth space. As of last quarter, Stratasys is now the largest of the 3D printing companies on both a market cap ($6.1 billion) and annual revenue ($610.1 million) basis, with 3D Systems trailing behind at $5.3 billion and $589.8 million, respectively.
Stratasys was founded in 1989, so it's been in business for 25 years. The company offers a wide range of 3D printers for consumers, educational institutions, and commercial and industrial companies. It also provides on-demand 3D printing services for customers. The company is based in both Minnesota and Israel; that's because the current company is a result of the 2012 megamerger between U.S.-based Stratasys and Israeli-based Objet. Stratasys made another very notable acquisition when it bought MakerBot in 2013. MakerBot manufactures 3D printers that are very popular with "makers" (3D printing hobbyists), though engineers in some companies also use them for prototyping purposes. Since it acquired MakerBot, Stratasys has been focusing on schools as another target market.
Let's examine whether Stratasys has the makings of a future blue chip stock.
Source: Stratasys.
What are blue chip stocks?
Blue chip stocks are stocks of large, well-established, and financially sound companies that have been in business for many years. A blue chip stock is generally the market leader in its industry, or at least among the top few companies in its sector, and usually pays a dividend. Blue chip stocks typically have "high-quality" earnings, which means their earnings are reliable, not volatile. Because they've been in business for many years and are market leaders, blue chip stocks are usually household names.
The Dow Jones Industrial Average's 30 members are typically considered the bluest of the blue chip stocks.
What makes Stratasys a potential future blue chip stock?
Stratasys currently meets a couple of the nonofficial criteria typically associated with a blue chip stock:
- It's the leading (or co-leading, more accurately) company in its industry.
- It's financially sound, as it has no long-term debt and generated $24.7 million in free cash flow in the trailing-12-month period.
However, Stratasys falls short in several respects:
- It's not a household name.
- Its earnings can't yet be considered reliable.
- It doesn't pay a dividend.
As to the first point, Stratasys seems on its way to becoming a household name. Just a few years ago, 3D printing was a topic largely limited to technology enthusiasts and a select few involved in stock investing (such as members of Motley Fool Rule Breakers, led by Fool co-founder David Gardner, as this newsletter began recommending Stratasys back in 2008). Now 3D printing is rapidly becoming a more mainstream topic. That's because there have been tremendous advances in the technology within recent years, which has led to many new and innovative uses. Some of these applications have garnered considerable press. Additionally, awareness among the general public is surely increasing because more schools are becoming equipped with 3D printers.
Given 3D printing's torrid growth dynamics, awareness should continue to increase. These two factors, actually, are circular. As awareness increases, so, too, will growth, as more consumers and businesses will consider buying 3D printers. According to Wohlers Associates, largely considered the experts on the industry, the global 3D printing industry grew 34.9% in 2013, which is the highest annual growth rate in 17 years. Wohlers expects the industry to grow from $3.07 billion in 2013 to more than $21 billion by 2020; that's greater than a 31% compounded annual growth rate for the next six years.
The second and third points are related. A company, or at least a responsible one, won't start paying out dividends until its top management believes its earnings will remain quite stable for the foreseeable future. Typically, companies don't pay dividends while they're in their high-growth stages. While Stratasys had been historically profitable, its profitability was negatively affected by its merger with Objet. Notably, Stratasys is expected to be profitable from a basis of generally accepted accounting principles, or GAAP, once again in 2014.
While investors can probably count on positive earnings going forward, they can't bank on stable earnings. Given the attractive industry growth dynamics, Stratasys is pursuing an aggressive growth strategy. It's sacrificing short-term profits (or some, at least) for spending aimed at fueling long-term growth and capturing as much market share as possible. While this is a wise move, it does mean that Stratasys' earnings could be choppy. Additionally, it certainly means that the company won't be paying a dividend in the foreseeable future.
Is Stratasys one of the next blue chip stocks?
Stratasys has the potential to become a blue chip stock, as the company's management has done a very good job executing on its strategy. Management execution will become increasingly important as new entrants join the 3D printing space, as they surely will, given its attractive growth dynamics.
However, blue chip status is likely a good number of years away. The company's spending on growth initiatives in the years ahead means that its earnings could fluctuate, and it probably won't be paying a dividend anytime soon.
Stratasys has huge upside potential, though it also has considerable downside risks. So it's a stock suited for those with longer-term investing horizons who can stomach wild price swings and possible sizable losses. It's currently not a stock for those looking for stability.
