Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Stratasys Ltd. (SSYS 0.96%) closed down 10.8% today after the leading 3D printing company reported third-quarter results that topped analysts' estimates for both revenue and earnings, but cut its full-year 2014 adjusted earnings estimates.
So what: Stratasys' quarterly revenue soared 62% to $203.6 million on impressive 35% organic growth, topping analysts' average estimates of $195.5 million, while its adjusted EPS increased 29% to $0.58, beating the consensus by a penny. While these are strong results, the market is a forward-looking machine and almost always punishes a stock for cutting guidance, no matter the reason. Further, it will sometimes send shares tumbling when a company simply maintains guidance when an increase is expected. So, it's not surprising the market wasn't happy when Stratasys notched down its full-year 2014 adjusted earnings per share to a range of $2.21-$2.31, from its previous range of $2.25-$2.35. The company maintained its previous full-year revenue guidance of $750 million-$770 million.
Stratasys stated in its release that the reason for the bump down in adjusted EPS guidance was to "account for the recent acquisition of GrabCAD, with the expectation that ongoing development costs, as previously disclosed, are expected to negatively impact the fourth quarter by $0.03 to $0.05 per share."
While the market never takes well to a guidance cut and is often correct that such a move foreshadows trouble ahead, the market's reaction was irrational here, in my opinion. Additionally, anyone closely following this stock should have expected that there was a high probability of an adjusted EPS cut of $0.04. Stratasys clearly stated when it closed on the GrabCAD acquisition in late September that there would be a negative impact on Q4 earnings in the range of $0.03-$0.05. My colleague Steve Heller covered this fact in his article about the acquisition.
Granted, Stratasys probably shouldn't have raised its adjusted EPS guidance when it reported second-quarter results. It increased non-GAAP EPS to $2.25-$2.35, up from $2.15-$2.25. So, this punishment can be considered self-inflicted. However, what most likely happened is that Stratasys didn't have plans to acquire any companies that would negatively affect its third or fourth quarter earnings at the time it released second quarter results, and then GrabCAD came on its radar as a "don't miss" opportunity.This is reasonable, and these things will happen in the fast-growing 3D printing space.
Now what: Stratasys turned in an overall strong quarterly report. The market's reaction was overblown today, so investors should ignore it as noise. This isn't to say that there aren't challenges for the company ahead; however, the real concern is Hewlett-Packard's recently announced entrance into the 3D printing market, not Stratasys' lowering of its guidance because of what was probably an an unexpected attractive acquisition candidate appearing on its radar screen.
Stay tuned, as a deep dive into how HP's entrance into the 3D printing space could affect Stratasys' growth prospects is slated to publish later this weekend.
