Better Buy: Stratasys, Ltd. vs. 3D Systems Corporation

Image source: Stratasys.

3D Systems (DDD -1.15%) versus Stratasys (SSYS -1.11%). It's the eternal debate for the 3D printing industry. 3D Systems is a $1.8 billion company that's expected to generate $653 million in revenue this year, while Stratasys is a $1.3 billion company that Wall Street estimates will ring up $711 million in sales. The two have nearly identical business models, have been affected by the ongoing industrywide slowdown in customer spending, are the target of new competition, and have struggled with execution in recent years. Due to these similarities, determining which company may have an advantage over the other requires a deeper look.

Business model: tie
On a high level, 3D Systems and Stratasys primarily sell 3D printers, materials, and services to a broad base of professional and industrial users. The hardware side of both companies employ a razor-and-blade model -- first selling a 3D printer then repeatedly sell proprietary materials over its lifecycle at a high markup. The larger their installed base of 3D printers, the bigger the potential pool of long-term recurring revenue.

On the services side, both companies operate a network of for-hire service centers to 3D print parts on behalf of customers and provide warranty services to its installed base. Service centers also act as a prospecting channel to sell more 3D printers.

Technology: 3D Systems wins
3D Systems has seven 3D printing technologies in its portfolio -- the most diverse technology set of any 3D printing company -- whereas Stratasys has three. Diversification helps 3D Systems mitigate the risk of competition and allows it to target more 3D printing use cases than Stratasys. Theoretically, the more use cases a company or technology can target, the greater its market opportunity.

3D-printed plastic. Image source: 3D Systems.

Beyond technological diversification, 3D Systems caters to a wide range of materials outside of plastic, including various metals and ceramic. Currently, Stratasys' hardware offerings are solely focused on plastic 3D printing, which could theoretically limit its growth potential.

Installed base: Stratasys wins
Despite Stratasys exclusively focusing on plastic 3D printing, the company has amassed the largest installed base in the industry. At the close of fourth quarter of 2015, Stratasys has collectively sold 146,024 3D printers between its Stratasys, Objet, and MakerBot brands. Longer term, this market-leading installed base fuels Stratasys' consumable business, which declined by 1% year over year in the fourth quarter -- an impressive feat, considering 3D printer sales fell 37% in the same period.

Unfortunately, 3D Systems doesn't disclose its installed base data to investors. It also doesn't refute that Stratasys has the world's largest installed base.

Revenue and margin performance: Edge to 3D Systems
In 2015, industrial and professional 3D printing demand slowed across the world, which negatively affected 3D Systems' and Stratasys' businesses. Despite these headwinds, 3D Systems' acquisition strategy allowed it to produce nominal growth, while Stratasys reported an annual revenue decline.

On the margin front, 3D Systems' adjusted gross margin, which excludes the charges related to exiting the consumer 3D printing business, remained more stable than Stratasys adjusted gross margin that excluded one-time charges related to the underperformance of its MakerBot and commercial 3D printing units. Generally speaking, sustained margins suggest a company is managing its costs well and isn't likely to be experiencing pricing pressures or differentiation issues.

Data sources: 3D Systems and Stratasys.

Execution: tie
Throughout 2015, 3D Systems' and Stratasys' execution has been equally dismal. 3D Systems struggled with finding a balance between making acquisitions and focusing on operational excellence. Its multi-year hyper-aggressive acquisition strategy created too many moving parts for management to realistically control, and it started coming at the expense of operational efficiency and quality control.

Customized 3D-printed exoskeleton. Image Source: 3D Systems.

Stratasys' biggest execution blunder was the severe reliability issues it faced surrounding MakerBot's fifth-generation Replicator platform, particularly around the "smart" extruder. The customer fallout was severe enough that management was forced to write off more than the initial cost of the unit -- $403 million, before performance earn-outs – because MakerBot's valuation could no longer be justified relative to its dwindling growth potential.

Competition: Stratasys more at risk
Over the next 18 months, several notable entrants have plans to introduce breakthrough 3D printing technologies that claim to be significantly faster and superior in terms of surface finish than what 3D Systems and Stratasys currently offer. The list includes 2-D printing giant HP, start-up Carbon3D, and imaging juggernaut Canon, which all focus on the same material: plastic.

Arguably, with Stratasys solely focused on plastic 3D printing, it's more exposed to the threat this new competition poses than 3D Systems, which has a taken a multi-material approach to its market opportunity.

Financials: Edge to Stratasys
Financially speaking, 3D Systems and Stratasys are in good shape. They both owe zero long-term debt, have considerable cash, and their current assets cover their total liabilities (current and long term) by a rough factor of 2. In other words, both companies appear to be sufficiently capitalized to weather the currently weak customer spending environment and restructure their businesses.

Data sources: 3D Systems and Stratasys.

No clear winner
After running through the paces, it's clear that 3D Systems and Stratasys are more alike than they are different. Both companies are navigating a challenging macroeconomic environment with gun-shy customers, working to improve their execution while conducting major restructuring efforts, and face similar competitive threats. It would be one thing if one company was executing flawlessly and the other wasn't, but that doesn't appear to be the case.

Ultimately, it's a tough sell for me to say either company is a "better buy" than the other -- nor am I sold on buying either company before execution and the industry environment improves.